Wondering how to invest in iron ore? Here’s a brief overview of the market, including supply and demand dynamics and investing options.
Iron is one of the Earth’s most abundant elements, and, because of its strength and low cost, it has many applications. However, the metal’s top use by far is in the production of steel.
Rocks and minerals from which iron can be economically extracted are called iron ores. These ores are usually rich in iron oxide and come in a range of colors. The iron in such ores is usually found in the form of magnetite or hematite, but can also be found in other forms.
Obtaining iron from iron ore is a complex process, and companies that mine iron ore tend to sell the material they mine as it is. Prices for iron ore have suffered in recent years, but some investors remain optimistic about the base metal and wonder how they can enter the market to benefit from its advantages. Read on to learn more about the space and how to start investing in the metal.
Investing in iron ore: Supply and demand
Australia is the largest producer of iron ore by far, with Western Australia’s Pilbara region being a notable hotspot for the commodity. Its output came in at 900 million metric tons (MT) of usable iron ore in 2018, or 560 million MT of iron content, says the US Geological Survey’s most recent report on iron ore.
Other major producers in the iron ore mining industry include Brazil, China and India.
Unlike most commodities, the majority of iron ore trades under contracts in which major counterparties negotiate annual changes in prices. In recent years, oversupply paired with lower than expected demand from the Chinese steel industry has made things difficult for the industry and has put major downward pressure on the iron ore price.
In fact, activity in China has traditionally been the key driver of global iron prices, given that it is the world’s largest producer, user and exporter of steel. Along with concerns about a slowdown in Chinese growth, ongoing and seemingly escalating global trade disputes have weighed on the price of iron ore.
While the iron ore market has been weak for the past year, there is no doubt that there will always be demand for steel, as it is used heavily in infrastructure, transportation and manufacturing, and is necessary for economies worldwide to remain productive and function.
As the population grows, demand for steel will likely make a comeback and even out the current supply glut. Of course, this equilibrium will also rely on what the big miners do moving forward.
Investing in iron ore: Consider stocks
Investing in iron ore producing companies is the main way investors gain iron ore exposure. In recent years, smaller iron ore producers and iron ore exploration companies have struggled to stay afloat due to low prices for the commodity.
As a result, investors have gravitated toward the world’s largest iron ore mining companies, such as Vale (NYSE:VALE), Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO), BHP (ASX:BHP,LSE:BHP,NYSE:BHP) and Fortescue Metals Group (ASX:FMG,OTCQX:FSUGY).
For those considering iron ore investment opportunities, these majors may be a good place to start.
This is an updated version of an article originally published by the Investing News Network in 2017.
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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.