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Iron ore prices have hit multi-year highs as demand soars on infrastructure investment

National Development and Reform Committee announced that we are ready to launch iron ore futures in Beijing, China.

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Iron ore prices have soared to multi-year highs this week as Chinese government stimulus spurs infrastructure building, boosting prices of the commodity even amid a global pandemic.

Spot iron ore prices rose to around $130 a dry metric ton on Tuesday, according to commodity price reporting agency Argus. This is the highest level since 2014.

“Stimulatory measures in China and other countries have played the pivotal in reviving economic activity and, with that, demand for commodities,” ANZ Research strategists Daniel Hynes and Soni Kumari wrote in a report on Wednesday.

The sustained rally in iron ore prices comes after the price of the steel-making ingredient tanked to a trough of $80 a ton in March.

The strong gains come after Beijing pumped hundreds of billions of dollars of fiscal stimulus into its economy to help it bounce back from the coronavirus pandemic. Much of this stimulus would go into infrastructure.

In July, China imported a record 112.65 million metric tons of iron ore, a rise of 24% from a year ago and up 10.8% from June, according to customs data.

China imported 11.8% more iron ore in the first seven months of this year as compared with the same period in 2019, Reuters calculations show. China also produced a record amount of crude steel in July.

“Bulk commodities continue to benefit from infrastructure investment in China. Steel production has been surprisingly strong and improving steel mill margins should keep the output resilient in the short term,” the ANZ strategists said in their note note. A depleted iron ore stockpile also helps, the bank added.

Concerns over Brazil supply

Iron ore prices are also supported by concerns over Brazilian supply, as the major producer is also a coronavirus hotspot. A dam disaster in 2019 had also hit supply.

“Continued concerns over Brazil’s iron ore supply, as coronavirus cases and deaths continue to plague the country’s mining regions, have boosted iron ore prices along with strong Chinese demand as steel production has started to heat up with the country’s V-shaped recovery,” Fitch Solutions said in an Aug. 14 report.

However, iron ore’s price rally may not be sustained, said ANZ. “We see iron ore prices normalising once the seasonal slowdown in construction activity sets in,” the bank’s strategists said in another report on Aug. 12.

Fitch Solutions said it expects prices to remain elevated until 2021 before declining modestly.

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