This is the first part in a series of articles describing how satellite-based analytics can provide valuable intelligence for traders of iron ore, the primary input for making steel. In this piece, we describe the basics: the major players, pricing, and supply chain steps.
Iron Ore Market Overview
If there’s one country that dominates the conversation around the global iron ore market it would be China, as it snaps up some 70% of seaborne shipments.
China is a major iron ore producer in its own right, ranking third globally, yet that’s still not enough to feed the country’s massive network of smelters that churns out half of the world’s steel.
Iron ore traders want to know the current and future state of China’s demand, which in turn mostly hinges on the pace of construction and engineering projects.
Unfortunately, the view into China’s economy is hazy at best, leaving much to be desired by market participants. Fortunately, this creates an opportunity for satellite-based analytics to fill the void, a topic covered in future installments in this series.
Let’s continue to lay the ground for understanding the iron ore market.
Supply Chain Stages
The supply chain begins at the mine and moves to a portside stockpile where iron ore is loaded onto a vessel that undertakes an ocean journey.
Once at the export destination, the cargo is off-loaded to a portside stockpile, transported inland, and stored at smelterside stockpiles before being fed into a blast furnace.
Port Hedland, Australia, the world’s largest iron ore export terminal
Iron ore operation in Pilbara region, Western Australia
Offloading iron ore at Port of Rizhao, China
Each of these steps – production, storage, transportation and smelter consumption – contain valuable data points that inform the collective understanding of market conditions and influence prices.
Market-moving factors include China-level data on iron ore inventories & imports, steel making trends, economic sentiment, and construction activity.
China’s central role is underscored by the benchmark contracts in both the physical and financial markets, which stipulate the delivery of 62% iron ore to north China.
The price reporting agencies S&P Global (Platts) and Argus each assess the physical market, while futures contracts are listed on the Singapore Exchange, Dalian Commodity Exchange and Comex (part of CME Group).
On the supply side, the three major exporters – Australia, Brazil and South Africa – can also influence iron ore prices, particularly in the event of any disruptions (e.g. caused by weather).
Indeed, iron ore prices have rallied in the second half of 2023 on an expected increase in Chinese demand, boosted by fiscal spending that should lift construction activity, combined with a drop in supply from Australia and Brazil.
Citing these twin factors, analysts at Goldman Sachs project iron ore prices will average $110 in 2024, a 22% increase from their previous forecast of $90.
The Goldman analysts said China’s inventories are already low, which means prices could rise sharply in the event of a supply disruption.
Inventories (i.e. stockpiles) figure prominently in any discussion of market fundamentals. The amount held in storage is an indicator of the supply-demand balance. Levels rise when supply outstrips demand, and vice versa.
In our next piece, we will look at some of the major ports where iron ore is stockpiled and discuss how information on stockpiles can help traders stay ahead of price movements.