Iron ore is the main raw material used to make steel, which means its price is tied closely to construction, manufacturing and infrastructure around the world. It does not trade on screens in quite the same way as gold or oil, but it matters a great deal to UK markets because some of the largest companies in the FTSE 100 are big iron ore producers. This guide covers the main forces that move the price.
What iron ore is and how it is priced
Iron ore is rock containing iron, dug out of the ground and shipped, mostly by sea, to steel mills. Most of the trade is seaborne, moving in very large bulk carriers from exporting countries to steelmakers.
Prices are usually quoted for a standard grade of ore delivered to China, and benchmarks often refer to ore containing a set percentage of iron. Higher grade ore, which needs less processing and produces fewer emissions, can command a premium. Futures linked to iron ore trade on exchanges in Singapore and China, and these are widely followed by traders.
China sits at the centre
China is by far the biggest buyer of seaborne iron ore, because it produces a very large share of the world’s steel. That makes Chinese demand the single most important driver of the price. Traders watch for signals such as:
- Property construction activity, which has historically used large amounts of steel.
- Government spending on infrastructure like railways, bridges and power networks.
- Steel output figures and any official limits on production.
- Factory activity surveys and wider growth data.
Our guide on how industrial metals react to China data explains why these releases can move the whole metals complex at once.
The supply side
Supply is dominated by a handful of large producers, mainly in Australia and Brazil. Major miners include Rio Tinto, BHP, Vale and Fortescue. Because so much supply comes from a few regions, events there can matter:
- Weather, such as cyclones in Western Australia or heavy rain in Brazil, can disrupt mining and shipping.
- Accidents, mine problems or regulatory action can take output offline.
- New projects coming on stream, such as the large Simandou development in Guinea, can add supply over time.
Stockpiles of ore held at Chinese ports are also watched closely. Rising port stocks can suggest supply is outpacing demand, while falling stocks may point to tighter conditions.
Freight and the dollar
Because iron ore travels long distances by sea, shipping costs play a part. Changes in freight rates can affect the delivered price and the relative appeal of ore from different regions. The Baltic Dry Index is one gauge traders use for bulk shipping conditions.
Like most commodities, iron ore is priced in US dollars. A stronger dollar can make it more expensive for buyers using other currencies, which can weigh on demand at the margin.
Why UK traders care
Iron ore prices can have a noticeable effect on the profits, and share prices, of the big diversified miners listed in London. Our explainer on what drives FTSE 100 mining shares covers how commodity prices feed into that part of the index.
There is also a currency angle. Iron ore is one of Australia’s largest exports, so the Australian dollar can respond to swings in the price, especially when the moves are driven by Chinese demand.
Common mistakes to avoid
- Treating iron ore as if it moves in lockstep with copper. The two often share drivers but have different supply stories.
- Reading a single Chinese data release as a turning point for the whole year.
- Assuming a rising iron ore price always lifts mining shares. Costs, other commodities and company news matter too.
- Ignoring how sentiment around Chinese policy announcements can move prices before any actual demand change.
Bringing it together
Iron ore prices are driven mainly by Chinese steel demand, supply from a few large producers in Australia and Brazil, port stockpiles, freight costs and the dollar. For UK traders it matters through mining shares and the Australian dollar. Watching the balance between China’s appetite and global supply is usually the best starting point.
If you would like to see how well you understand commodity markets, our free trader assessment is a sensible place to begin.
