Iron ore prices touch five-year high

Iron ore prices are again touching multiyear highs. According to the metal bulletin, the benchmark iron ore prices (62% iron ore content) surged to ~$95.3 per ton on April 8, which is the highest level since August 2014. Another defining feature of the current rally is the compressing price difference between lower grade and higher grade ore. While the price of 58% ore has nearly doubled since late November, those for 62% and 65% ores have risen 48% and 31%, respectively.

Is the Party Just Getting Started for Iron Ore Miners?

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Last year, the theme was the expanding difference between low and high-grade ore as Chinese mills switched to high-grade ore after authorities started cracking down on polluting units.

Supply disruptions

The major factors leading to this surge are the supply disruptions in the two largest iron ore exporters, Brazil and Australia. Vale SA (VALE) is the largest seaborne iron ore supplier in the world. On January 25, one of its dams burst in Brazil (EWZ), which led to a series of dam decommissioning and production injunctions from local authorities, impacting its iron ore supplies for the foreseeable future. While this development was already acting as a tailwind for seaborne iron ore prices, disruptions in Australia also piled up.

Demand-side strength

In addition to supply disruptions, the recent run in iron ore prices is also supported by demand from Chinese mills. Since the Vale dam burst on January 25, iron ore prices have increased, benefitting miners’ (XME) stock prices.

Between January 25 and April 9, Rio Tinto (RIO), BHP Billiton (BHP), and Cleveland Cliffs (CLF) have gained 29.4%, 21.2%, and 14.9%, respectively. Vale (VALE), on the other hand, has lost 8.7% of its value since then.

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