Currently, the benchmark iron ore contract for delivery to China is hovering at $59 per metric ton. So far, iron ore has gained 34% this year. The price gains are a welcome break for leading iron ore companies (GNR) such as Cliffs Natural Resources (CLF), Rio Tinto (RIO), and Vale (VALE). Iron ore prices have been sliding after almost hitting the $200 per metric ton level at the beginning of 2011. Even with the recent price rise, iron ore prices are only about one-third of the peak in 2011.
Prices have been falling
Benchmark iron ore prices have lost ~40% and 50% in 2015 and 2014, respectively. At the beginning of the year, iron ore prices weren’t expected to see such a major rebound. There were obvious reasons for being bearish on iron ore. On the supply side, markets were oversupplied with major miners including Rio Tinto, BHP Billiton (BHP), and Vale increasing their production despite the prevailing glut.
The demand side of the equation looked even scarier amid concerns that Chinese steel demand has peaked. China is the largest consumer of seaborne iron ore. It accounts for two-thirds of seaborne demand. As a result, lower Chinese demand is negative for iron ore prices.
What happened in 2016?
Most analysts had written off iron ore as being dead long ago. So, why did iron ore prices have a substantial price increase this year? One factor that can be attributed to iron ore’s price action this year could be increased Chinese demand. Chinese steel production fell YoY (year-over-year) in January and February. Since then, production has risen YoY every month.
In the next part of the series, we’ll see how this is impacting iron ore prices.