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Factors behind the Recent Volatility in Iron Ore Prices

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Oct. 30 2017, Updated 6:36 a.m. ET

Iron ore prices: Volatility continues

Iron ore prices slid into the bearish territory in September 2017 by falling 12% in a single week. The steel capacity cuts planned for plants in China during the winter months, leading to lower steel production, led the iron ore prices to slide as well.

While the expectation at that time was for iron ore prices to fall much further, it did not materialize. Iron ore prices are still hovering around the $60–$65 per ton range. There were several factors that helped the steel-making ingredient’s prices in October.

One of the important factors supporting these prices was China’s near-record iron ore imports, which underscored the fact that China isn’t out of the iron ore demand game.

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Differential expands

China’s appetite for imported iron ore has impacted the iron ore market in one fundamental way. The stockpiles at Chinese ports are growing by the day despite higher demand for iron ore by China. This trend is mostly a result of China making a shift away from lower-grade material to higher-grade, low-impurity material.

Most of the ore domestically available in China is very poor grade material, which increases pollution. Chinese authorities’ crackdown on pollution ahead of the winter months has led mills to demand higher-quality ore, most of which is imported. 

As a result, this trend led to the widening of the differential between the prices of benchmark ore (62% content) and sub-62% iron ore.

Impact on iron ore miners

While capacity cuts have reduced the overall demand for iron ore, the demand for quality ore has increased. This, in turn, is beneficial for the miners producing such material.

Iron ore miners (XME) such as BHP (BHP), Vale (VALE), and Rio Tinto (RIO) usually produce high-quality ore. Cleveland-Cliffs’ (CLF) Asia-Pacific unit and Fortescue Metals Group (FSUGY), on the other hand, produce sub-62% ore, thereby attracting discounts to the benchmark prices.

In this series, we’ll explore the likely course that iron ore prices are expected to take going forward. We’ll look at the forward-looking and coincident indicators for iron ore.

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