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What Factors Affect the Price of Iron Ore?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 September 2016
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Iron ore is essential to the production of steel and a wide range of other products involving the use of different types of iron as a basic ingredient. As with most types of metals, the price of iron ore is subject to a number of factors, including shifts in demand, the current available supply and even political issues that may restrict the delivery of the ore to buyers. For this reason, businesses that rely on the iron ore industry often pay close attention to those price movements, as those changes will also have an impact on the level of revenue those businesses can expect to generate.

One of the key factors that affect the price is demand. There are several factors that can serve to either boost or decrease that demand, including the state of the economy. The shift will often occur in the demand for the products made using the ore. For example, if building construction decreases due to a period of recession, this means that companies manufacturing steel goods used in construction will have to curtail operations. As a result, they will purchase less iron ore, prompting suppliers to lower prices in an attempt to move the ore and avoid carrying a large inventory or temporarily shutting down a part of the operation.

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Supply also plays a role in determining the price of iron ore. When the supply on hand is less than the demand, buyers are willing to pay more for the raw material in order to secure enough product to keep their business operations going and filling their customer orders. At the same time, when the supply on hand greatly exceeds the current demand, there is a good chance that ore producers will lower the price of iron ore in order to motivate buyers to purchase more now in anticipation of upcoming projects that may materialize.

Shifts in the political scene can also have some impact on the price of iron ore. New governments sometimes impose additional trade regulations that affect the ability to import or export the ore. When this is the case, investors may find that investing in options connected with the ore offers a lower return and may not be worth the time or effort to acquire or hold.

Quality will also pay a role in the price of iron ore that a particular supplier can command. Should that product be considered of inferior quality, possibly due to contamination, the ability to compete with other businesses with a reputation for providing ore that is of higher quality will be extremely difficult. As a result, that supplier will have to cut pricing in order to sell the ore, even if there is a fair amount of demand in the marketplace.

Typically, no one factor will serve as the sole reason for the current price of iron ore. In most instances, multiple events and trends will exert some degree of influence, either driving up the price or causing it to nosedive for a period of time. Paying close attention to those underlying factors and assessing how long they will be relevant is often helpful in planning when and how much ore to purchase at any given point in time.

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Markerrag
Post 3

@Logicfest -- your scenario could only be true if all mining companies were using the same strategy. In a competitive market, the goal is to attract consumers by cutting costs and bringing prices down.

If mining companies were all agreeing to keep prices high while cutting costs, that would be a classic example of collusion. Certainly you're not saying that is what's taking place -- such a practice is illegal in most nations.

Logicfest
Post 2
@Terrificli -- do lower labor costs really save consumers money or increase corporate profits? An argument has been advanced that one of the things that make hiring less expensive labor so popular is that companies who adopt that strategy can realize higher profits while not raising the cost of their goods.

That argument appears to have some merit. Let's say a chunk of iron ore costs a consumer $1. If a company spends 50 cents in labor to mine that chunk of ore, then the labor cost represents half of the cost of that iron ore. Let's say the mining company moves to an area of the world where labor is cheap and iron ore is plentiful, so it costs 10 cents in labor to yield a chunk of iron ore. The company still sells it for $1, but has increased its profit by 40 cents.

We're using rough numbers here and not factoring in transportation costs, but you get the idea.

Terrificli
Post 1

What about labor costs? Those can be a huge factor in how much iron ore costs and is one of the few variable that can be controlled by an ore mining operation. One of the reasons we've seen mining jobs go from nations where labor costs are higher to ones where they are not has to do with companies wanting to cut costs on what they sell so that they can remain competitive in the global economy.

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