What Caused Iron Ore Prices to Hit a Two-Year High?



Trump effect on iron ore prices

Seaborne iron ore benchmark prices have remained strong this year. For the first time in two years, on November 14, 2016, iron ore prices touched $80 per ton. With this, the YTD (year-to-date) gains for the steel-making (SLX) commodity have reached 82%. In contrast, in November last year, iron ore prices were close to $40 per ton.

Donald Trump’s win of the US election added fuel to the fire of iron ore’s already steady gains, which caused the futures markets to explode. On the Dalian Commodity Exchange, iron ore futures traded for as high as $90 per ton. Fundamentally, investors were hopeful about Trump’s pre-election pledge to spend $500 billion on infrastructure projects, which is supportive of commodity prices. Speculators took this rally as a chance to make further profits, which led to prices spiking again. Chinese authorities clamped down on speculative activities by increasing margin requirements and transaction fees, which calmed some of the frenzy.

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Followed by upgrades

The commodity price strength was, however, renewed by Goldman Sachs’s (GS) price upgrade. After remaining bearish on commodities for the past four years, Goldman Sachs raised its price forecasts for commodities, including iron ore. As we’ll discuss later in this series, other investment banks have also raised their forecasts on the back of strong commodity prices.

Performance of iron ore miners

With stronger iron ore prices YTD, iron ore miners have recuperated from some of their losses. Cliffs Natural Resources (CLF) has outperformed, with a YTD rise of 342% as of November 15, 2016.

Fortescue Metals (FSUGY) and Vale (VALE) have risen 221% and 130%, respectively. Rio Tinto (RIO) and BHP Billiton (BHP) (BBL) have risen 30% and 35%, respectively.

In this series, we’ll analyze the supply-demand fundamentals for iron ore and see why iron ore prices are surging again after taking a breather in September. We’ll also discuss the outlook for iron ore prices for the remainder of 2016 and beyond.

We’ll look at Chinese (FXI) steel production growth, supply-side growth, speculative trading, inventory, and analyst recommendations. These factors should help you get a clearer view of the future direction of iron ore prices. In the next part, we’ll look at Goldman Sachs’s recent price upgrades for commodities, especially iron ore.


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