Hopes for a rebound in China’s property market have been driving up the price of iron ore
Hopes for a rebound in China’s property market have been driving up the price of iron ore
Iron ore is one of the main ingredients that goes into steel. And steel, of course, goes into just about everything — ships, cars, buildings, appliances.
The price of iron ore has risen nearly 39% over the past year, according to data from the Federal Reserve.
It’s still well below the all-time high it hit in the summer of 2021, but the commodity been getting more expensive.
China accounts for 70% of global demand for iron ore and until recently, China’s economy wasn’t looking so good, according to Rohan Reddy, director of research at Global X ETFS.
“There was just a lot of negativity towards the Chinese economy and just how China was trending,” he said.
Exhibit A: China’s crisis-ridden property market, which once demanded a lot of steel. Lately, though, China’s government has made aggressive moves to stimulate its economy.
“So they’ve had like three rate cuts this year already and so that’s been helpful, I think, in balancing some of the fears about China,” Reddy said.
Beijing also told its steel makers this year it wouldn’t enforce an annual cap on production aimed at curbing carbon emissions. Iron ore supply has not kept up with the resulting demand.
University of Houston finance professor Craig Pirrong says higher ore prices will affect steel made from scratch.
“The importance of steel as sort of a major price or cost driver in the United States is relatively modest,” he said.
That’s because here, most new steel is actually recycled from old steel.
“So it would have some impact on prices of goods generally in the United States, but not a huge one,” Pirrong said.
He says the rally in iron ore prices seems driven more by speculation than reality.
“Basically the same period of time that the iron ore market has been going up, the Chinese stock market has been going down,” he said.
China is dealing with stubbornly high unemployment and shrinking factory activity, and Campbell Harvey, a professor of finance at Duke University, says the country’s commercial real estate market remains in disarray.
“They have overbuilt. They have ghost cities. And it’s really hard to see China returning to the robust growth that they’ve experienced over the last 10 years,” he said.
Harvey says investors who have been helping drive iron ore futures higher might be seeing not what’s there, but rather, what they want to see.
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