Iron ore hits 5-year high on supply constraints

Iron ore continues to gain and has been gradually climbing, but in February, the gains grew faster due to the tailings dam collapse at Vale - Brazil mine.

The production declined by approximately 90 mt due to the issue faced by Vale mines, and the supply tightened.

While the rate was moving in the range from $96 a tonne to $108 a tonne in the last month, the price shot from June 28 from $109 to $123 on July 2, which marked the highest since March 2014, where the total gains since January 25 are at 64%.

The rates have not gained above $100 since 2014, and now the recent shortfall in supplies has brought the commodity into a leading position where the markets may remain tight till 2021.

Several large iron ore producers are modifying their long-term production goals to meet the new demand created by the current situation, where the exports are expected to gain significantly from 2018 - 2019, from 806 mt to 869 mt in years from 2020 to 2021.

It has been good news for the Australian miners who see an opportunity where the heavy-hitting miner Rio was 1 per cent up to $104.75, and BHP was 1.3 per cent up to $41.68 in the first two days of July.

Is it a bubble?

The increase in Brazilian output and Australian production can counterbalance the supply-demand ratio to prevent excessive gains. Some investors believe a temporary bubble has been created in the metal price. If the supply returns, the price may decline.

Brazil shipped 30.63mt in June, considerably higher than May’s (28.3mt) and April’s (17.2mt) supplies.

The decline in production in China has been adjusted by other areas like India, where the production increased, as the demand for iron ore is high in the international markets.

Global Markets

Markets have been expecting a resolution of a trade war to some extent where the iron ore was given a lift in price by the Citi analyst who predicted the price to be at $114 per share.

Further falling steel inventories in China could be a reason for the gains where the Department of Industry, Innovation and Science has been forecasting the steel output may decline in China to 930 million tonnes.

Globally, the equities were at a record high, but the long-term Treasury yields were down to two-year lows over the expectations that the Fed would ease the monetary policies.

In the Eurozone, Germany and Spain, they are continued to show weak performance despite reporting one of the highest activities. In the UK, the global trade war and the expectations of no-deal Brexit have impacted the economy, which may need monetary policy support to regain.

The pound remained at its lowest of two weeks in the first week of July. Oil continues to remain at a low even though the OPEC nations agreed on a production cuts extension.