How the Iron Ore Market Works
Iron ore is an essential component of the global iron and steel industries. Almost 98% of mined iron ore is used in steel making. About 50 countries mine iron ore, with Australia and Brazil dominating the market share for exports.
Mines in Michigan and Minnesota account for the bulk of iron ore production in the United States. In 2019, U.S. mines produced 46.9 million metric tons of iron ore. Australia led production with 919 million tons, followed by Brazil with 405 million tons.
In 2019, global prices for iron ore averaged $93.85 per ton, an increase of 40% from $69.75 per ton in 2018. Prices were $113.71 per ton as of September 2021.
Key Takeaways
- Iron ore is the key input of refined iron and steel products.
- Prices fell to a low in 2015 as steel demand in China weakened.
- Iron ore dropped to a 2020 low of $82.90 due to the COVID-19 pandemic, which caused a global reduction in steel consumption and production.
- Investors can gain exposure to iron ore price fluctuations by investing in public companies that extract iron ore or use it as a key input in their business.
What Is Iron Ore?
Iron ore is the third most common element making up the Earth. The principle components of iron ore are hematite and magnetite. Taconite is a low-grade iron ore. Iron ore is not strong enough for construction, and other purposes, so raw iron is alloyed with other elements such as tungsten, manganese, nickel, vanadium, and chromium. The steel made from iron ore is used in construction, automobile manufacturing, and other industrial applications.
The U.S. is estimated to hold 110 billion tons of iron ore, representing 27 billion tons of iron. Most of this is taconite located in the Lake Superior district of Michigan.
Iron Ore Price Fluctuations
Over the years, iron ore prices have fluctuated wildly. For example, prices were $187 per metric ton in February 2011 and then plunged to approximately $41 per ton in December 2015.
The price collapse was largely attributed to a drop in steel demand from China. The country purchases nearly two-thirds of the seaborne iron ore supply, which supports the businesses of major producers such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE). In addition, these companies have access to low-cost iron ore deposits and benefit from economies of scale. As they ramped up production, the market went into oversupply, which forced high-cost iron ore mines to scale back production or fold.
In 2020, iron ore saw decreases in production, trade, and shipments due to the COVID-19 pandemic, leading to a global reduction in steel consumption and production. As a result, prices dropped to a 2020 low of $82.90 in June of that year, after touching $119.58 nearly one year earlier in July of 2019.
In 2021, iron ore rallied back, with prices peaking at $215.81 per ton in June of 2021, before dropping to $113.71 per ton by September 2021.
Cost is Key
The operating costs of the top iron ore producers are among the lowest in the world. A fully commercial iron ore mine requires heavy capital investment in infrastructure such as rail lines and heavy machinery. Other factors impacting cost include the type of metallic iron that is economically retrievable at the mining site, distance to market, government regulations, and fuel costs.
In 2020, Fortescue Mining Group (FSUMF) had a reported cash cost of $12.78 per ton. This compared to the $18.60 per ton cash cost reported by Vale. Rio Tinto had a cash cost of $15.40 per ton, while the figure was $12.63 per ton for BHP Billiton.
Large Players Dominate
A few key players dominate iron ore supply and demand. The top producers are listed below:
Source: U.S. Geological Survey.
Although China was the No. 3 iron ore producer in 2020 with 351 million tons, it was also the top importer, buying up 75.4% of the global trade. Japan was the second-largest importer, purchasing 6.1% of international trade, followed by South Korea at 4.4%.
The top 2020 exporting countries were Australia, which sold 56% of the global trade; Brazil with an 18.4% share; and South Africa with a 4.4% share.
Iron ore mines belonging to BHP Billiton, Rio Tinto, and Fortescue Metals Group are located in Australia, while Vale has operations in Brazil.
The Bottom Line
Large economies of scale benefit the biggest producers, who can afford to weather iron ore price fluctuations. This allows them to take market share from smaller players that have higher costs. Global steel demand is expected to remain healthy, rising 1.7% to 1.8 billion tonnes in 2020.
The long-term investment plans of the top three iron ore producers show that they intend to reduce costs further and increase production aggressively. Over the long term, the low-cost iron mines could potentially fill the gap that appears as smaller companies go under. The gain in market share would likely benefit margins, operating cash flow, and profits. The threat of a new entrant changing the dynamics in the iron ore market, as it is today, is low.
