One of the hottest commodities of 2021 – iron ore, which hit a record above US$230 a ton as recently as May, seems to be flaming out. The price of iron ore has fallen over 45% since its all-time high in May on demand concerns from China, which makes over half of the world’s steel.

One of the hottest commodities of 2021 – iron ore, which hit a record above US$230 a ton as recently as May, seems to be flaming out. The price of iron ore has fallen over 45% since its all-time high in May on demand concerns from China, which makes over half of the world’s steel.

Notably, producers across the globe have been met with falling iron ore prices, exhibiting an atypical crash in the commodity. Contingencies at both the consumer’s and suppliers’ ends have crafted a challenging path for iron ore prices to tread on. Surprisingly, prices have crashed even faster than they rose earlier this year.

The recent fall in iron ore prices can be attributed to the slackening global demand, which has taken a massive hit following the dry spell casting on China’s demand for the metal. China’s weakening demand for iron ore has been shaped largely by an economy experiencing a slowdown. Overshadowed by rising delta variant cases, China’s economy has been striving hard to recover from the pandemic-induced slowdown.

Moreover, growing expectations that China’s steel output will shrink over the remainder of this year is fuelling the price fall in the commodity. For quite some time now, China has reiterated restraining steel production as it seeks to limit carbon emissions. Meanwhile, the recent bounce back in the US dollar seems to be adding to investors’ worries in energy markets, putting pressure on commodities denominated in greenback, including iron ore.

Factors have been unfavourable at the supply side too, where some of the biggest producers like Australia and Brazil have not been able to meet necessary demand. Recently, Australia suffered a major setback after China slashed its steel exports by 50 per cent to ‘wean’ itself from Australia’s resources.

The ongoing pullback in iron ore prices seems to be a great deal for Australia, where worsening trade relations with China, lockdown restrictions and depreciating currency have all come together to mandate the need for rebalancing measures. Such measures can probably compensate for declining economic activity amid pandemic-driven challenges. Mirroring the economic slowdown, Brazil’s economy has also demonstrated a reduced supply of iron ore due to the disruption caused by the pandemic.

Having said that, one cannot neglect that iron ore prices are recording a bounce back over the past few days on expectations a revival in economic growth and some signs of resilient demand in China. Beijing’s success in containing the new COVID-19 outbreak seems to have shored up confidence in the demand outlook. Meanwhile, hopes of additional support from the Chinese government have bolstered prospects of a boost in steel demand and economic growth.

However, as political relations worsen between China and Australia, fears loom that iron ore’s changing demand and supply dynamics could become more pronounced in the coming months. This could greatly change the way the global economic recovery forge ahead. In fact, declining iron ore prices could potentially become more detrimental than usual in case the softness in the Australian dollar continues. All in all, the coming months are likely to be marked with significant changes in the iron ore market that will eventually pave the way for long term trends.

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