Iron ore outstrips gold as year’s best-performing major commodity

Iron ore has outpaced gold to rank as the best-performing major commodity this year, as a rebounding China sucks in vast amounts of the key steelmaking ingredient from mines in Australia and Brazil.

The price of the rust-coloured raw material has risen almost 21 per cent in 2020, just ahead of gold, which is up 19 per cent as central banks have introduced huge stimulus programmes to try to quell the coronavirus crisis. Such activities have pushed down yields on trillions of dollars of fixed-income assets, burnishing the relative appeal of gold, which yields nothing.

Meantime, signs that China, the world’s biggest producer of steel, is mounting a solid recovery have propelled iron ore prices, which rose above $112 a tonne on Wednesday, according to S&P Global Platts, up 9 per cent over the past month.

As part of plans to reinvigorate its economy, Beijing recently announced plans to boost spending on infrastructure through an increase in local government borrowing.

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A state-backed rally in Chinese equity markets has also played a big role, as investors looking for China-growth proxies have piled into iron ore derivatives.

Tyler Broda, analyst at RBC Capital Markets, said long-term demand trends for steel remained uncertain, given China’s increasing dependence on debt to fund new investment. But the shorter-term outlook was bright, he said, because of policymakers’ clear focus on safeguarding jobs.

Data released this week showed China imported more than 100m tonnes of iron ore in June, up from 87m in May. That was the highest monthly figure since October 2017.

It also means that China’s steel production in June is likely to have surpassed May’s total of 92.3m tonnes. This would put the country on course to produce a record 1bn-plus tonnes this year, compared with just 750m tonnes for the rest of the world.

Analysts said the sustainability of Chinese demand would be the main factor determining the direction of prices in the second half of the year. But supply disruptions could also have an impact, and not just in Brazil where Covid-19 is still spreading rapidly.

In Australia, big operations that were running at full strength in June are planning maintenance work on rail and port facilities.

Shipbroker Braemar ACM noted that last month it saw record levels of shipments from Port Hedland, the world’s biggest iron ore loading facility, in the Pilbara region of Western Australia. But so far this month, it said, Australian iron ore listings had averaged slightly more than 2.2m tonnes a day, about 18 per cent lower than in June.

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Brazilian exports have also stumbled, with shipments down 23 per cent week on week to 5.3m tonnes in the seven days to July 12, according to UBS.

The rally in prices comes as some of the world’s biggest iron ore producers are due to update the market on their production and shipments.

UBS estimates Rio Tinto, which is due to issue a production report on Thursday, shipped 88.1m tonnes in the three months to the end of June, up more than one-fifth from the preceding quarter.

At current prices, analysts say the company could generate more than $10bn in free cash flow this year — potentially paving the way for a bumper dividend alongside half-year results in August.

“The persistent strength in Chinese steel output, combined with lacklustre volume growth in the seaborne market, have led us to upgrade prices for the remainder of 2020,” said Dominic O’Kane, analyst at JPMorgan. “Higher Brazil exports should dampen some of the tension, but we now expect prices to hover over $90 a tonne for the next two quarters.”