Looming Supply Disruptions Could Send Iron Ore Prices Even Higher

Iron ore has continued its rally from last week, and on Tuesday futures advanced above $57 per ton amid Chinese restocking ahead of winter. Iron ore prices pulled higher last week as Chinese buyers returned to the market following a week-long holiday, and now the gains have continued into this week.

Restocking ahead of winter is common, and this is price supportive, but when the winter hits a lull is typical. However, this year, weather may come into play and support prices. While winter is approaching in the Northern Hemisphere, it is actually summer that is approaching in the Southern Hemisphere, and this could impact iron ore production in major producer Australia.

Cyclones hitting Western Australia are nothing new, but this summer is expected to be particularly stormy, with the Australian Bureau of Meteorology predicting that inclement weather due to “neutral to weak La Niña conditions in the tropical Pacific Ocean and warmer than average ocean temperatures to the north and east of Australia,” will mean a higher-than-average number of cyclones for the region. The Bureau expects at least two of the 11 tropical cyclones it is predicting will make landfall, and this could disrupt iron ore production, and this market tightness could in turn support prices.

Iron ore prices are already up 32% this year. They peaked in August above $61 per ton, then corrected, but are now approaching the high waterline for the year, again. With Australia, a major producer, it is important to note how much upside a supply disruption can contribute to iron ore prices. In 2011, floods in Australia, which damaged iron ore production and transport, sent iron ore up to $191.50 per ton early in the year. Towards the end of 2010, before the supply disruptions, iron ore was trading around $146.

Donald is a strategist for economiccalendar.com. He specializes in a fundamental approach while informing traders of relevant economic data. Actively trading since university, Donald trades indices and commodities. He earned his Bachelor's in Finance from Baruch College's Zicklin School of Business in New York City.