The price of Iron ore recently jumped 7% on Tuesday in an effort to keep up with expected economic growth and boosted demand for steel. Additional support from the Chinese government is also expected to help the recovery. 

According to Fastmarkets MB, benchmark 62% Fe fines imported into Northern China were changing hands for $146.13 a tonne, up 7.3% from Monday’s closing.

Iron ore is rocks and minerals that are made up of metallic metals that can be extracted and used for a variety of different purposes. The ores can range in colors from red, orange, deep purple, grey and more, and are usually rich in iron oxides. Common forms of iron that are usually found within iron ores include hematite, magnetite, goethite, limonite, and more. 

Iron ore is the primary source of iron for all iron and steel industries, making it essential for the production of steel. You need roughly 1.5 tonnes of iron ore to make about one tonne of steel. Since China is by far the world’s largest steel producer, they use more iron ore than any other country. 

After months of lockdown from the global COVID-19 pandemic, China decided to ramp up construction for apartments and other infrastructure, which requires a lot of steel. However, the demand is starting to fall as the Chinese economy is slowing down in general, which includes building homes and other structures. 

“The infrastructure and property sectors account for 20-25% and 25-30% of China’s steel demand respectively,” noted Commonwealth Bank commodities analyst Vivek Dhar.

“We think part of the weakness in China’s steel demand is linked to widespread restrictions to contain China’s latest COVID-19 outbreak.”

In regards to the Chinese economy slowing down, “China’s central bank chief vowed to stabilize the supply of credit and boost the amount of money supporting smaller businesses and the real economy after both credit and economic growth slowed in July.” 

Erik Hedborg, principal analyst at CRU Group said “people (in China) are hoping for some further stimulus targeting the infrastructure sector, as real estate and manufacturing are looking bleak.” 

“In the rest of the world, we are seeing steel production stabilizing at levels below pre-pandemic levels.”

The future of iron ore prices and production may be uncertain in the near term, as the global pandemic numbers begin to rise again in some countries. However, Vivek Dhar is “optimistic that Chinese authorities might soften their targets, as steel shortages start pushing up prices and therefore construction costs.” 

“We think policymakers will eventually relax steel output restrictions when steel prices increase because the steel output cuts prove to be more severe than any slowdown in China’s steel demand,” he wrote.

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a licensed professional for investment advice. The author is not an insider or shareholder of any of the companies mentioned above.