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What Factors Will Impact Iron Ore Prices in 2017?

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Jan. 25 2017, Published 11:54 a.m. ET

Iron ore price drivers

The price of any commodity, including iron ore, is driven by the supply and demand for that commodity. In turn, supply and demand impact the fortunes of iron ore miners such as BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and Cliffs Natural Resources (CLF).

To be specific, four key factors could drive iron ore companies’ performances in 2017:

  • China’s steel production outlook
  • production growth plans by majors
  • curtailments in iron ore capacity in China and elsewhere
  • miners’ cost curves
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Demand side

Later in this series, we’ll explore how each of the above-mentioned factors could play out in 2017, which should give us a better understanding of the iron ore industry’s 2017 outlook. We’ll begin by looking at how Chinese steel demand could shape up in 2017.

China’s (MCHI) economic slowdown is the biggest challenge for global metals and mining companies, which is why iron ore investors should keep a close eye on the Chinese economy.

Supply side

While demand is one part of the equation, buoyant supply has been a major reason for iron ore miners’ woes and analysts’ pessimistic outlook. The capacity that was planned at the time of China’s construction and infrastructure-led boom came online just as demand from the world’s largest iron ore consumer faltered. Therefore, it’s important to look at miners’ production growth plans going forward in 2017.

Capacity curtailment in the iron ore sector is one factor that could limit the downside to iron ore prices. Such curtailment would correct the supply-demand imbalance to an extent, so investors should keep an eye on this.

Investors who want broad-based exposure to this industry can consider the SPDR S&P Metals and Mining ETF (XME). Currently, XME has almost half of its holdings invested in US-based steel companies.

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