Wondering if investing in iron ore is a good idea? 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. The metal’s top use by far is in the production of steel, a key material in the world today.
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 2016 brought a turnaround and iron ore became the year’s top-performing commodity. Strong iron ore demand from China is largely seen as responsible for the rise, though other factors were at play as well.
Many experts believe that 2017 will not be as strong a year for iron ore prices. Indeed, the first quarter of the year brought a steep fall in prices, and midway through April iron ore was sitting at a five-month low. Nevertheless, some investors remain optimistic about iron ore and wonder how they can enter the market. 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 world’s largest producer of iron ore by a long shot. Its output came in at 825 million MT of useable iron ore in 2016, or 491 million MT of iron content, the US Geological Survey’s most recent report on iron ore says. Other large producers of iron ore include Brazil, China and India.
According to Forbes, steady demand from China and supply cutbacks from high-cost producers are the two main factors that drove iron ore prices higher over the course of 2016. Speculative iron ore trading also helped to fuel the rally, which ultimately sent prices up more than 80 percent during the year.
This year, iron ore production cutbacks are not expected. In fact, major iron ore producers are expected to increase production this year — for example, both Vale (NYSE:VALE) and Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) have recently expanded their mining capacity. That is one reason that many experts believe the iron ore price will continue to fall this year.
Of course, demand is also part of the equation. As noted above, Chinese demand for iron ore helped prices rise last year; the Asian nation is the world’s largest producer of steel by a wide margin, and in 2016 it produced a higher-than-expected amount of the material.
In 2017, iron ore demand from the Asian nation is not expected to be as strong. In a recent Bloomberg article, Dane Davis, an analyst at Barclays (LSE:BARC), explains that the current iron ore price drop is being “driven by a slackening in end-use steel demand.” The news outlet notes that one reason steel demand is falling in the country is that the government is tightening restrictions on its real estate market.
FocusEconomics makes a similar comment in its latest report. “China’s likely shift of focus towards addressing key structural economic changes will slow down infrastructure spending this year, while the authorities’ attempt to cool the property market risks hurting the main consumer of steel,” says the firm.
And while US President Donald Trump’s planned $1-trillion infrastructure spending plan had stoked hopes of increased iron ore demand, some market watchers are now doubting whether he will be able to push the plan through Congress.
Investing in iron ore: Consider stocks
All in all, 2017 looks set to be a worse year for iron ore prices than 2016 was. Currently prices are sitting at around $65 per tonne, and getting into the market is undeniably risky. That said, there are definitely still investors and experts who believe that enterint the space is a worthwhile endeavour.
“While some may label this a bear market, the reality is that prices are still 33 percent higher than they were this time last year and well above any levels seen since 2014,” Bloomberg quotes Australia & New Zealand Banking Group (ASX:ANZ) as saying.
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 major producers of iron ore, such as Vale, Rio Tinto, BHP Billiton (ASX:BHP,LSE:BLT,NYSE:BHP) and Fortescue Metals Group (ASX:FMG).
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.