Never underestimate iron ore. It’s a commodity that’s been intrinsically linked to China’s economic growth over the past two decades.

Prices are at a five-month high and have risen 55% over the past three months to around the $150 a tonne mark, as we approach a ‘normalisation’ of China demand post the Winter games.

An important factor in determining what China will bear in terms of iron ore prices is the profits margins of its steel mills, which encouragingly are still robust, largely tracking between $US90 and $US120 per tonne of steel rebar. Steel mill profitability is a significant driver of iron ore prices and would need to be lower to meaningfully pressure iron ore prices lower.

From a longer-term perspective, interestingly this week we have seen various statements relating to guidance for China’s steel industry development – with the most noteworthy message being that China is marginally loosening control on its steel sector, with the industry’s carbon peaking deadline delayed to 2030, which was believed to be 2025 by the market. Meanwhile, the new guidance has removed the target on both iron ore self-sufficiency and ownership of overseas iron ore mines.

All this is supportive of iron ore prices.


Industrial metals are all trading in a situation of severe backwardation, which underlines the supply squeeze that’s persisting within the market – driven by escalating demand in combination with restricted supply.

The Bloomberg Commodity Spot Index highlights this situation well, as its climbed to its highest ever level this month, and has more than doubled from a four-year low reached early in the pandemic.

One of the best examples is aluminium, where prices are at their highest level since 2008, with concerns surrounding tight supply and low inventories. The crucial aspect here is energy and rising costs – with smelters in Europe and China under pressure – and so buyers are drawing rapidly from stockpiles and pushing them to critically low levels.

We are seeing a similar situation with respect to other key industrial metals – including nickel, tin, copper and zinc in particular –which is adding to inflationary pressures throughout the world economy.

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