Iron ore is common in the crust of the earth and almost all mined iron is used to produce steel which we all know is the back bone and a necessary in several industries. Below we will go through some basic knowledge regarding iron ore and show you some cases and scenarios that you can be faced with when you trade in iron ore.
Iron is found below the surfice and in the crust of the earth and is mined. Iron was first used ca 4000 year ago and is today a necessary in several building constructions like houses and bridges. Iron ore is extracted from the mines or from the very surfice of the earth with heavy machinery and transported to place nearby where its grinded to smaller pieces and later melted in to iron. How profitable a mine is depending on how expensive it is to extract the iron ore and how much pure iron you can extract from the ore. The purity of the ore tends to range between 20-70%. Iron has been used by humans for a long time and in large volumes making iron ore less accessible hence since the ore with the highest purity of iron is often already mined making the extraction process of the iron from the ore more and more important. To produce steel you melt iron and ad coal, and the level of added coal make up the characteristics of the steel. Steel is used to make several constructions like houses, bridges, rail roads etc.
Iron is used in other products than construction like food supplements, for both humans and animals but the share of iron used to other stuff than steel production is negligible and nothing you really need to put any effort in
When you want to trade in iron it’s important to know where its mined in order to analyze if events in those countries will affect the price of iron. The largest producers in the world of iron is by far Australia, with less than half the Australian amount we have Brazil on the second place and China on the third.
What tend to affect the supply and demand of iron?
- Tariffs and other trade protection
- The demand of steel, i.e. the economic development in the world especially China
- Political changes
- The USD
- Cost of production
Several producing counties of iron and often see iron and steel production as the back bone of their industry and politicians often tend to protect their country’s production of steel. They often tend to do that via tariffs and other trade protecting actions. This will have effects on the price of steal and something you have to have in mind when trade in steal. What effects will the tariffs have? Will it increase the price a lot in the beginning because everybody wants to front run the tariff and create a good opportunity to trade in iron on a short-term basis?
Almost the sole use of iron is steel production, and the use and demand of steel tend to be driven by the economy in general, if the economic activity is positive and in a upgoing trend this will often increase the demand and the price of steel and can be a good analysis to do if you want to trade in iron for the longer run. China is known for their big infrastructure expansion and has been a driver of the whole world economy but also the demand for steal since its necessary when you expand your infrastructure. China is also important for steel and iron since they are a big producer of iron but they consume so much that they still need to import steel even though they are the third biggest producer in the world of iron.
This also mean that investors tend to use the price of iron as a measurement on the economy and if you want to play your view on the world economy a trade in iron could be one way to do it.
Politicians also tend to affect the price of iron. Let’s take the result of the American election as an example. When Donald Trump won the election, he campaigned that he wanted to make big infrastructure programs and since USA is the biggest economy in the world this affected the price of iron since expansion of infrastructure demands steal, hence iron. Events like this is often quite binary and can be a good opportunity for a short-term trade in iron, on either the long or the short side.
As iron ore is priced in USD, and if the American dollar is weak or strong can change price perception of counties not paying in USD when buying iron or steal. Hence a trade in iron can be one way to play a strong or a weak USD,
As we went through in the start of this section about iron the profitability of the iron ore mining is driven by the purity of the ore but also the efficiency of the machinery and how accessible the ore is. New purer deposits of better machinery can affect the price of iron and something you have to follow up on from time to time when you trade in iron so you don’t miss out on some short- or long-term trends on the efficiency and profitability of the iron ore production.
Reasons why you might want to invest in iron ore
As we have went trough in the above section there can be several reasons why you want to trade in iron ore but there are also be several reasons why you want to invest in iron ore with a longer time horizon. An investment in iron ore can be made on both the long and the short side and through iron you can position yourself as a believer in a trend or if you are skeptical. Below we will line up some events and exemplify them to show how an investment in iron could play out.
- Portfolio diversification
- Hedge, inflation and USD
- Bet on the economy
- Bet on China
Diversification is often one of the biggest reasons why investors look for investment sin commodities and in this case iron ore. Below we will go through how you could position yourself if you believe or don’t in world economy. Of course, you can instead of buying or selling iron, buy or sell a big stock index that will cover large parts of the world, but like most investors you already have stocks in your portfolio and increase the number of asset classes in your investment portfolio will increase your diversification and in theory decrease your average risk of your investment portfolio.
An investment in iron can give your portfolio valuable characteristics. Commodities tend to have a low correlation to other asset classes which is a characteristic that an investor often like. During high inflation environments commodities tend to do well and go up in value while other asset classes might make an investment in iron a good inflation hedge. When the USD is weak also some asset classes tend to perform poorly but this will often increase the demand for iron since its priced in USD and for buyers in other currencies iron will look cheaper. When the demand of iron goes up the prices often tend to go up making an investment in iron ore a good hedge against a weak USD.
The end use of iron is almost for certain steel production, and as we have mentioned above the demad of steel tend to be high when the economy is doing good hence pushing up the price of iron ore. If you want to play the expanding economy a long investment in iron ore could be a good way to play it. But if you are skeptical about the economy a short investment in iron ore could also be a way to play that.
China is the third larges producer of iron and steel in the world but probably the biggest user of it making them import a lot of steel each year. This makes China and the Chinese economy a big factor for the demand and the price of iron and steel. If you are bullish on the Chinese economy and want to increase your diversification in your investment portfolio an investment in iron ore could be a way to play an expanding Chinese economy. But if you are skeptical about the Chinese economy a short investment in iron is a way to play it.