Poor fundamentals keep iron ore prices under pressure

Subject

Poor fundamentals undermine the iron ore market rally.

Significance

Iron ore confounded its sceptics in 2016, gaining more than 50% after three straight years of decline. Sentiment towards the steel-making ingredient was bolstered by renewed fiscal stimulus in China and then by the promise of a physical infrastructure renaissance in the United States after the election of Donald Trump as president. Fundamentals have now begun to reassert themselves though amid growing Chinese inventories. Indeed, the commodity has lost nearly 40% of its value since peaking at more than 90 dollars per tonne in late February.

Impacts

• The International Finance Corporation has said that it will exit the 20-million tonne Simandou iron ore project in Guinea.
• The Western Australian government has proposed an additional levy on iron ore operations, which would reduce supply from marginal deposits.
• A collaboration of Brazil’s Vale and Australia’s Fortescue has not developed a new ore blend, undermining the rationale behind a merger.
• Brazil's government plans to introduce a flexible royalty rate for iron ore, which would be linked to global iron ore prices.