You’ve probably heard the term “Dr. Copper” to describe copper’s role in serving as a good bellweather of the global economy.
But all the buzz these days is about iron ore, a key ingredient in steel.
This morning, a hedge fund manager in Europe sent us this chart of front month iron ore futures over the last couple of years.
Photo: Business Insider
It’s obviously very early, but that is one ugly chart.
Included with the chart he sent this nice, quick overview:
Iron ore is second biggest commodity traded internationally by volume (after oil). It is the main ingredient in the production of steel. China is by far the worlds #1 producer of steel and importer of iron ore (over 60% of seaborne ore goes to China).
While Wall Street focuses on Oil, Natural Gas, Copper etc., Iron ore is a huge commodity that is highly reliant on Chinese demand. While most other commodities are recovering from their lows Iron Ore is crashing. The spot peaked this year at around $150/ton in April (highs close to 190 last year). The spot now is around $105 per ton and falling fast and the futures (now fairly liquid and traded internationally) are pricing q4 below $95/ton.
The drop in the futures of over 10% this week will no doubt show up in the spot price in the next week or so. While Bloomberg, FT etc. report on moves on the spot price they are a bit oblivious to what happens on the futures (spot is a slow moving index, futures are bets on future level of index). While Wall Street doesn’t trade iron ore, the major miners (Vale, BHP, Rio Tinto, and Fortescue Metals) have a combined market cap of over $300 billion.
This is definitely the source of a lot of buzz all of the sudden thanks to the ferocity of the collapse.
Put this together with the rough results from miner BHP Billiton, and it’s not hard to get a sense of the squeeze being put on the purveyors of base industrial metals.