The most important commodity after oil deserves more attention than it gets
THE development of a process to turn raw earth into steel merits a high spot on a list of mankind’s most ingenious achievements. The metal provides the backbone of skyscrapers, bridges and motorways, and the carapace and internal organs of cars, fridges and washing machines. Given steel’s ubiquity—it makes up 95% of global metal production—iron ore, the raw material from which it is made, attracts strangely little attention.
The trade in iron ore makes it the second-largest commodity market by value after crude oil. Some 2 billion tonnes of the stuff will be dug up in 2012. The price swings of the past few months say plenty about the world economy, as well as the febrile state of global commodity markets. Between June and September spot prices for iron ore fell from around $140 a tonne to close to $85, a three-year low, way off a record high of over $190 a tonne set in February 2011. Prices have recovered a bit since, settling at around $100 a tonne. Had the oil price undergone similar upheavals it would have provoked endless discussion.
Iron ore lacks the clout of oil for several reasons. The market is smaller, worth less than a tenth of the $3 trillion of crude traded every year. Unlike oil, iron is plentiful—it makes up 5% of the Earth’s crust. The difficulty is finding it in sufficient concentrations and then shifting millions of tonnes of dirt to where it is needed. Iron ore is also largely a physical market; the ability to make big speculative punts on oil generates far more interest about where prices are heading.
The commodity has a turbulent past. Franco-German territorial disputes, in part over control of the iron ore and steelmaking capacity of Alsace’s neighbour, Lorraine, helped take Europe to war. But as the 20th century progressed the steel industry broke free from its reliance on local inputs. Steel-hulled freighters allowed the cheap shipping of bulk goods such as iron ore and coal.
Japan’s post-war reconstruction, which was based on developing heavy industry, saw a country with no raw materials import high-grade ores from the nearest source—Australia. The Japanese signed long-term contracts of a decade or more to ensure Australians could secure mining investment. Contract periods shortened with the arrival of competition from Brazilian ore, resulting in a one-year benchmark-price system that lasted for 40 years.
The system worked because global steel production grew only slowly and iron-ore prices didn’t change much (see chart). Then, in 2003, China slipped past Japan to become the world’s biggest importer of iron ore. By 2008 China imported three times as much (it now accounts for 60% of total world imports). Prices rose rapidly as a mining industry starved of investment after years in the doldrums couldn’t keep up with demand.
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