The big dipper

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Commodity prices have been on a wild ride over the past year and the white-knuckle journey seems unlikely to end any time soon. Indeed, the long-term contracts that used to be a feature of the iron ore market are long gone, and both supplier and consumers of this bulk mineral now have to deal with volatile spot prices and China’s often extreme inventory cycles.

As a result, investors in the resource sector should take note that iron ore prices are likely to be subject to often wild seasonal price swings through the year – prices tend to be stronger earlier in the year, then trail off by year end..
In turn, this reflects swings in Chinese demand. China’s iron ore demand tends to be stronger in the fourth and first quarters of each calendar year, as iron ore inventories are rebuilt, with prices tending to subside over the second and third quarters and inventories are wound back down again.

Price swings over the past two years illustrate this seasonality. Spot iron ore prices peaked at almost $US190/tonne in early 2011 then fell to a low of US$111 by November that year, only to then stage a recovery to almost US$150 by April 2012. Prices then subsided again, touching a low of US$87 by early September. We’ve since had an impressive rebound that has pushed prices to a recent high of $US155 in February. Prices have since started to slide again.

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