The price of ore at the level of almost two years ago

Iron ore prices have been on a long-term downward trend, with contracts losing 35 percent in value since the beginning of this year alone. Looking at the year-on-year development, we can observe a drop of 18.5 percent. The price of futures contracts for October delivery fell below 90 USD per tonne on the Singapore Exchange on Monday 9th of September 2024, preceded by a drop of more than 8 percent in the first week of September. Less than 90 USD per tonne was last recorded in the autumn of 2022, when the commodity traded at 80.70 USD per tonne. Iron ore prices reached an all-time high in July 2021 at 213.95 USD. They are currently more than 56 percent lower.*

Price development of iron ore futures for October delivery over the last 5 years. (Source: Trading View)*

Impact on both steel and other metals

As iron ore is the main ingredient in steel production, we can see some correlation in the price development of both commodities. Steel rebar futures were trading at 2,940 CNY per tonne (413 USD) on the Shanghai exchange on Monday, close to a five-year low of 2,852 CNY (401 USD) in mid-August. This was a 50 percent drop from the October 2021 peak. CFD contracts for hot-rolled steel coils were also in a downtrend. On the New York Metal Exchange, they were priced at 700 USD per tonne, a drop of around 64 per cent compared to the peak in August last year.* Demand also weakened for steel-related metals such as copper, zinc and aluminium.

The evolution of steel coil futures prices over the last 5 years. (Source: Trading Economics)*

Price development of CFD contracts for hot rolled steel coils over the last 5 years. (Source: Trading Economics)*

The Chinese steel crisis is behind it all

The main factor behind the downturn is demand from China and its steel industry, which is the largest in the world. China's steel mills are currently facing problems due to the long-running crisis in the real estate sector, which uses 30 percent of the steel produced. The country is struggling with a decline in new building construction, which is leading to a glut of steel, reducing production and prices. According to Bloomberg, more than 150 million tonnes of unused iron ore is stored in Chinese ports, an unusual amount for this period. The chairman of China Baowu Steel Group, the largest steelmaker, Hu Wangming, described the current situation as probably worse than the crises of 2008-2009 and 2015-2016. According to Bloomberg analysts, government incentives are needed to cope with the situation, as was the case in previous instances. However, a positive factor could be the start of the country's construction season, with the China Iron and Steel Association saying September and October could bring a recovery as such.[1]

Australia's dependence on China

The unfavourable developments in China also directly affect Australia, which is a major exporter of iron ore to the country. It supplies around 250 million tonnes of iron ore a year to Chinese smelters, making it particularly vulnerable to the decline in steel production. A fall in iron ore prices means a fall in revenue for the Treasury, and each 10 USD fall could mean a loss of 500 million USD. This threatens to widen Australia's budget deficit and undermine economic growth, especially as much of the country's mining sector depends on steady demand from China. According to The Nightly, the Australian government even expects the deficit to reach 28 billion USD between 2024 and 2025, rising to more than 42 billion USD in the following period.[2]

The concerns are global in nature

Adding to the problems in China is global economic uncertainty, which is putting further downward pressure on iron ore prices. Investors are increasingly worried about a slowdown in global growth, especially as they face heightened political and economic instability ahead of the US presidential election. The possibility of renewed trade tensions between the US and China has caused Beijing to hesitate to introduce more significant measures.

Olívia Lacenova, principal analyst at Wonderinterest Trading Ltd.

* Past performance is no guarantee of future results.

[1,2] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance.They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.