Iron ore prices have been increasing over the past few months which convinced many traders to invest in metal stocks. However, things have been stabilising for some time. From the highs of $235 a tonne in May to under $100 recently, iron ore prices have decreased quite considerably.
The reason behind this is China which is responsible for half of the global steel output. Over the past year or so, manufacturing plants across China have been pumping record amounts of steel in a bid to support the economic recovery post-Covid.
This rally in the stocks led to some unintended consequences. Firstly, there was a general expectation that prices of iron ore, which is used to produce steel, would continue to rise for the foreseeable future. Hence, it incentivized speculators and hoarders to buy large quantities of iron ore expecting to turn a profit as prices increase.
In order to tackle this, the Chinese authorities went hard after speculators and hoarders in a bid to tame prices. As a result, the iron ore is becoming stable.
However, there were more developments like the Chinese state decided to cut steel output in the second half of 2021 because they had already breached their quota.
Now, steel production is highly energy-intensive and it pollutes the skies. So, manufacturing plants need to be eco-friendly in order to produce in large quantities.
The Chinese problem however is that old plants continue to function (since they’re cost-effective) and they pump out large quantities of steel. So the state has been trying to make sure that the full-year production didn’t exceed the output from last year. And as a result, they’ve been imposing additional curbs on manufacturers.
In fact, the Ministry of Ecology and Environment targeted steel mills in its annual winter air pollution campaign, ordering factories in 64 regions to curtail steel production between October and March next year.
Now there is the Evergrande Crisis which has caused a slowdown in the Chinese real estate sector. If demand for homes doesn’t increase, demand for steel isn’t going to increase either. If demand for steel falls, iron ore prices would follow suit which is what is happening right now.
China is only one part of the issue. Iron ore supplies have been hitting the market with exceptional regularity these past few months due to some other reason too.
Some time ago, natural calamities (including Covid) had affected parts of Australia and Brazil which are the two key exporters of Iron ore.
There is a steady stream of iron ore coming in from these countries which was highly affected and led to the entire fiasco.
So, at this point one of two things could happen . The new supply could create excess supply and dent iron prices further which is highly unlikely. The other option is that maybe demand from other countries will pick up as iron ore prices stabilize.
Most analysts now believe that this rally is now coming to an end and the investment decision should be taken as per that consideration.
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