Iron is one of the most abundant elements on earth and accounts for 95% of worldwide metal production. It is key in the construction of machinery, tools, automobiles, ships, buildings, etc., due to its strength and low cost. Because pure iron is very soft, it is most often used in the form of steel. Metallic iron is extracted from iron ore and its properties can be modified by alloying it with carbon and various other metals to create steels.
Unlike most commodities, the majority of iron ore trades under contracts in which major counterparties negotiate annual changes in prices. Vale, the world’s largest iron ore miner, is first in line to fix iron ore annual contract prices, followed by Rio Tinto, and BHP Billiton. These three dominate the seaborne iron ore market, and represent the most valuable mining stocks in the world. Although their stocks are listed as diversified, iron ore, coal, base metals, and other bulk commodities and metals constitute the majority of their current value.
Iron ore product prices are differentiated between lump (premium) and fines. After more than twenty years of trading between .22 and .40 cents metric ton unit, iron ore prices began to move up in 2004. Prices surged upwards in 2005, and this year has seen unprecedented settlements in terms of value and percentage escalation.
For example, Rio Tinto has recently reported a 79.9% year-on-year increase in fines prices to $1.4466/mtu and a 96.5% increase in lump prices to $2.069/mtu. Analysts expect further increases well into 2009 due to the “ongoing tightness in spot iron ore markets, and the continuing underpricing of freight differentials in Rio Tinto’s latest settlements.”
According to the Fortis VM Group’s recent Asian Metals Monthly, China’s heavily active growth in steel production is the single most influential factor responsible for the “soaring price” of iron ore. The world’s top steel producer and consumer, China manufactures about one-third of the global supply.
Although China’s production of iron ore has increased rapidly since 2000, it will soon need to depend more on imported iron ore. Already, its monthly imports are almost double its own production. China’s demand for iron ore to fuel its growing steel production will ultimately lead to even further increases in the price of iron ore products.
