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Can Iron Ore Prices Improve in 2018?

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Iron ore price movements in 2017

The volatility in iron ore prices in 2017 has continued into 2018 as well. Iron ore prices reached a peak of $95 per ton in February 2017 and tested a low of $53 per ton in July 2017. The wild price movements mainly had to do with China’s appetite for the raw material as domestic steel prices fluctuated along with demand.

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2018 starts on a weaker note

Prices in 2018 have fallen ~4% to $74 per ton. The most recent bout of weakness is due to weak physical demand in China due to seasonal factors. Steel mills are curbing output to adjust to the weak demand.

Price differentials and miners

The price drop is evident across all the grades of iron ore (XME). According to the Metal Bulletin, on January 26, 2018, benchmark iron ore prices (62% content) fell 0.85% to $74.4 ton while 58% content fines dropped 2% to $41 per ton. The iron ore with a higher content of 65% fell by a smaller 0.8%, settling at $90.1 per ton. Investors should note that after China’s switch from lower-grade ore to higher-grade ore, the differential between sub-benchmark and above-benchmark grades has expanded greatly.

In fact, one of the reasons Cleveland-Cliffs (CLF) cited in its recently released 4Q17 results for accelerating the closure of its Australian mining operations is the increased discount for its sub-benchmark iron ore. BHP (BHP) Rio Tinto (RIO), and Vale SA (VALE), on the other hand, on average produce benchmark or higher-grade ore.

In this series, we’ll explore the potential course iron ore prices could take. We’ll also look at the forward-looking and coincident indicators for iron ore.

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