Iron ore price soars amid the ongoing China-Australia trade war

Iron ore price is at its all-time high after rising by 10% to $206.20 per tonne. The surge is largely due to the high demand from China.

Heightened Chinese demand

The surge in iron ore price is largely due to the heightened demand from China. The Middle Kingdom is one of the countries that have recorded steady recovery from the coronavirus pandemic. In particular, its manufacturing sector has improved significantly. In April, the Caixin manufacturing PMI was at 51.9. Analysts expected a reding of 50.8 compared to the previous month’s 50.6. Figures above 50 are an indication of the sector’s expansion. According to the data, the country’s manufacturing sector has been expanding since May 2020.

Similar to other raw materials, iron ore has been subject to increasing demand. At China’s Dalian Commodity Exchange, iron ore futures for September delivery surged by 10% to hit its all-time high of $206.20 (1326 yuan) per tonne. In Singapore Exchange, the June futures contract rose by 10.3% to $226.25 per tonne. Notably, the surge is also reflected in the related commodities. In the steel market, hot rolled coils and construction rebar rose to 6,335 and 6,012 yuan respectively.

With the soaring iron ore price, the Australian dollar has strengthened against the US dollar. This is founded on the fact that Australia is a key commodity exporter, particularly to the Middle Kingdom. AUD/USD was up by 0.58% at $0.7889; its highest level since 26^th February. At the same time, Rio Tinto Limited’s share price surged to an all-time high of AUD132.94, UP BY 4.59%. BHP Group Limited’s stocks are also at the highest at AUD51.65.  

Atilla Widnell, the managing director at Navigate Commodities stated, “At present, market participants are trading iron ore derivatives…not based on fundamentals, just pure momentum.”

Australia-China trade war

For those looking to invest in commodities, the ongoing geopolitical tensions between China and Australia are key factor in iron ore price movements. Relations between the two countries went south in 2020 after Australia’s Prime Minister Scott Morrison stated that there was need for further investigations into the source of the coronavirus. The remarks fuelled the decline of China’s investments in Australia by 62%.

Notably, iron ore seems to be the thread holding the two countries together. On the one hand, Australia is the largest producer of iron ore globally. In the 2019/20 financial year, it produced over 910 million tonnes. This is close to double the amount produced by Brazil, which is ranked second. On the other end, China is the leading producer of steel. Interestingly, iron ore is a key component in steelmaking. As China embarks on its $500 billion infrastructure spending plan, investors will be keen to see if the geopolitical tensions affect the demand for iron ore.