Iron ore is one of the main raw materials in steel. And of course, steel is used in everything from ships, cars, buildings, and appliances.
Iron ore prices have risen nearly 39% over the past year, according to data from the U.S. Federal Reserve.
Although still well below the all-time highs reached in the summer of 2021, commodity prices are rising.
China accounts for 70% of the world’s iron ore demand. Until recently, China’s economy wasn’t doing very well, said Rohan Reddy, research director at GlobalX ETFS.
“There were many negative opinions about the Chinese economy and trends in China,” he said.
Exhibit A: China’s crisis-hit real estate market, which once required large amounts of steel. But recently, the Chinese government has taken aggressive moves to stimulate the economy.
“So they’ve already cut rates about three times this year, and I think that’s helping to alleviate some of the concerns about China,” Reddy said.
The Chinese government told steelmakers this year that it would not enforce annual production caps aimed at curbing carbon emissions. The supply of iron ore is not keeping up with the associated demand.
Craig Pilon, a finance professor at the University of Houston, said rising ore prices will affect steel that is made from scratch.
“The importance of steel as a major driver of prices and costs in the United States is relatively modest,” he said.
Because most of the “new” steel here is actually recycled from “old” steel.
“So there will be some impact on overall U.S. commodity prices, but not a huge impact,” Pilon said.
He said the rise in iron ore prices appears to be driven more by speculation than reality.
“The Chinese stock market has been falling for essentially the same period that the iron ore market has been rising,” he said.
China faces persistently high unemployment and reduced factory activity, and Campbell Harvey, a finance professor at Duke University, said the country’s commercial real estate market remains in turmoil.
“They have overbuilt. They have ghost cities. And it will be very difficult for China to return to the kind of strong growth that it has experienced over the past decade.”
Harvey says investors who have helped push iron ore futures prices higher may be seeing what they want to see rather than what is there.
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