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  • Writer's pictureLallic Partners

Disequilibrium in the Iron Ore Market – an Analysis of Global Commodities

Author: Dominic Byrne | Date: December 17th, 2020 | Editor: Nichola Monroe


With equities at record-high prices and bond yields near all-time lows, institutional investors and retail traders are investing their money into raw materials; a sector that remains well below historical peaks. The increase in demand from western economies and decrease in supply caused the price of many commodities to increase, while commodity stocks lagged.

“Things are booming,” said Jay Sandler, president of Imperial Zinc Corp., a Chicago-based manufacturer of zinc and aluminum products. During lockdowns earlier in the year, the outlook was dark. Now, employees are working overtime to keep up with demand, particularly from carmakers.


Stumbling economies in need of economic injections through infrastructure spending- as well as electric vehicle production and lower-interest rates - has increased global demand for global commodities.

In terms of demand, China accounts for roughly half of the global demand for copper and other raw materials. On China’s Dalian Commodity Exchange, Iron ore futures (an obligation to purchase at a predetermined price) increased by almost 10%, crossing the 1,000 yuan (~$152.95) per ton mark – an all-time high.

The surge in demand that increased the futures price was caused by strong economic performance, infrastructure stimulus, decreasing existing inventories, and constricting market conditions.


According to the World Steel Association, Australia supplied approximately 58% of the world’s seaborne iron ore in 2019. However, much of the world’s supply of iron ore and other raw materials are being disrupted.

“Supply was being disrupted as much, if not more so than demand,” said David Lilley, managing director at metals hedge fund Drakewood Capital Management.

Green projects from electric cars, charging stations and wind turbines use large amounts of copper, lithium and other raw materials, contributing to the positive outlook in the sector.


The iron-ore market expects a deficit next year, pitted in a large amount of demand, with a waning supply and supply issues.

According to Atilla Widnell, co-founder at Navigate Commodities, “The market is in disequilibrium right now – investors are trading industrial metals like iron ore as a speculative play on how China’s economy is going to perform […] there is no way iron ore can be at $150 based on demand and supply fundamentals.”

In addition, Morgan Stanley said iron ore prices look increasingly overbought, forecasting a deficit. At the same time, Goldman Sachs claimed the potential for more growth amid shortages. The multinational investment bank stated that it expects a “substantial” deficit in 2021, with consistent demand and restrained supply sustaining bullish price momentum above $100 per ton.

“The bull market for iron ore is set to extend into 2021 […] we now expect another substantial deficit next year, supported by a combination of only gradually decelerating China steel demand growth, sharply re-accelerating Western steel demand growth and tepid supply growth.”

Australia’s Port Hedland, a major export terminal, showed a slight decline in shipments in November 2020. In addition, the Pilbara Ports Authority issued a cyclone warning, clearing the port of large vessels – disrupting supply from Australia to other nations, especially China. However, China’s current iron ore port stockpiles are the lowest since October at 128.7 million tons. Thus, China will receive fewer imports from Australia and must rely predominantly on other nations and its own waning stockpiles.

Iron ore: Stock to watch – VALE

Vale is currently trading at approximately $17 and is a Brazilian miner producing roughly 300 million tons of iron ore each year as well as producing nickel. The company is the second-largest iron ore producer. Iron ore futures are currently trading at $150 per ton. When these conditions were the same in May of 2010, Vale was trading between $25 and $30. However, Vale decreased its estimated supply and 2021 guidance, partially due to a dam disaster, furthering fears of a shortage and uncertainty.

COKING COAL: Stock to watch – ARCH

Coking coal is one of the main ingredients in steel production as it used to ‘reduce’ the naturally occurring iron oxide into its steel alloy.

Arc Resources (ARCH) is an American Coking Coal producer; coking coal is different from thermal coal and used in steel plants in its production. The stock is currently trading at approximately $47 per share. ARCH began trading in late 2016 at $90 per share. However, COVID-19 shut down steel plants nationwide, causing losses in Q1-Q3 2020 as steel plants did not require coking coal. Coal futures recently reached $80 and higher per ton and are expected to increase further. ARCH has sold 20% of their 2021 production at $90 per ton as per their Q3 quarterly report. When ARCH was $90 per share, coal futures were $80 per ton.

STEEL: Stock to watch – MT

Arcelor Mittal (MT) is the world’s largest steel supplier, according to the World Steel Association. ArcelorMittal was up 9% intra-day as Societe Generale (SocGen) upgraded the stock to a ‘Buy’ from ‘Hold’ – with a new price target of €32.5 from €10.3. SocGen's Christian Georges stated that the successful deleveraging and derisking of MT is set to accord with a rigorous steel and iron ore price surge, supporting earnings recovery.

COPPER: Stock to watch – TECK

Teck Resources Limited is a Canadian Copper and Zinc miner with mines in Canada/Chile. The stock is currently trading at approximately $19. Copper futures are currently trading at roughly $3.5 per pound – last time futures were between $3.5 and $4.5 per pound, TECK was trading at $60 and released a $5 per share special dividend when copper hit $4 per pound in 2010.


“The two big unknowns have resolved themselves, and all we have now is a massive pump of money coming into the economy,” - Darius Tabatabai, a portfolio manager at Arion Investment Management.

The drastic disequilibrium in many commodity markets, specifically iIron ore, has caused a positive outlook in 2021 and a predicted bull-market in raw materials for the coming months . Perhaps raw materials are a good place for speculation and investment in the new year.


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