Iron Ore Prices Fall 55% From Peak: Analysing The Causes

China's insatiable appetite for steel drove iron ore prices to unprecedented heights over the past 25 years. Fuelled by the nation's infrastructure boom, industrialisation, and housing construction spree, the commodity experienced a meteoric rise, surging nearly tenfold in value since the mid-1990s, according to Bloomberg Data.

However, this rally has now cooled down. Prices have plummeted by more than half from their 2021 peak, falling below the $110 per tonne mark. Ironically, the very nation that ignited this price frenzy is now the major driver behind its downturn. Here's how.

China’s dominance in the global steel industry is undeniable. As the world's largest producer and consumer of steel, it also holds a stranglehold on the iron ore market, a critical ingredient in steelmaking.

Thus, the pace at which China's economy grows directly influences iron ore demand and prices. Periods of rapid expansion drive prices up, while slowdowns or contractions exert downward pressure. Recent data by the Statistics Bureau continues to indicate a slowdown in Chinese factory activity and real estate, which are two of the largest steel consumers, and thereby impact the market sentiment for iron ore.

Iron ore prices are currently trading around the $97 per tonne level, which is 55% lower than the peak price of around $200 in 2021.

According to industry expert Javier Blass' recent article, the market is not entirely crashing yet, as despite the price drop, current prices still stand seven times above the 1980-2000 average price of $12.5 per tonne. However, the rally in the previous years has been so big that it would require a massive retreat to bring prices anywhere close to what they were in 2000.

China's slow economic growth is what is putting pressure on prices. Earlier this week, China's leading producer, China Baowu Steel Group Corp., stated that the industry is facing a downturn more severe than the major slumps seen in 2008 and 2015. Slower growth and a property crisis, according to the company, have eroded steel consumption in the country.

Meanwhile, global iron ore producers, responding to the previous price surge, have ramped up production. New mines, particularly in Australia and Africa, are poised to further increase supply. This has led to a supply glut, with the market already oversupplied in the first half of 2024. Oversupply of any commodity in the face of lower demand from its top consumers has a negative impact on prices.