Iron Ore Trading In 2020: How And Where To Trade The Commodity

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Risk Warning: Your Capital is at Risk.

This iron ore trading guide focuses on the different ways you can trade iron ore as a commodity. We provide a list of regulated brokers in for traders who are ready to enter a market.

If you’d like to learn more about iron ore trading, we discuss some of the price drivers of iron ore.

More, we explore why traders may or may not consider speculating on iron ore prices due to significant influence from the Chinese market.

Reasons You Might Trade Iron Ore

Traders may consider buying iron ore for the following reasons:

  1. Bet on Steel Demand
  2. Bet on Resurgent Chinese Growth
  3. Inflation and Weak US Dollar Hedge
  4. Portfolio Diversification

Bet on Steel Demand

There are many reasons to be optimistic about future steel demand.

Emerging markets will need the material for important infrastructure projects such as buildings, airports and bridges. Also, as these economies grow, demand for automobiles should grow as well.

Global Infrastructure via Pixabay

In developed economies such as the United States, steel demand should benefit from infrastructure needs and economic growth.

If steel demand remains strong, then iron ore prices should benefit.

Bet on Resurgent Chinese Growth

The Chinese economy has experienced a slowdown in recent years, although some signs suggest that the economy is strengthening again.

Essentially, trading iron ore is a bet on a resurging Chinese economy.

In response to its surging growth and mounting pollution problems, Chinese officials have begun cracking down on mining. These developments have the potential to be very positive for iron ore prices.

Demand for iron ore in steel production remains strong in China even as domestic sources of supply diminish.

Inflation and Weak US Dollar Hedge

Trading iron ore is a way to bet on a weak US dollar and higher inflation.

Iron ore is priced in US dollars, so the performance of the American economy can impact its price. The US Federal Reserve Bank has kept interest rates low and the US dollar weak for many years.

US central bankers are likely to continue these policies to support consumer borrowing and spending. These conditions are likely to be very beneficial for commodity prices.

A weak dollar could stoke inflation concerns. There is a limited supply of iron ore, and producing it is an energy-intensive endeavor.

The price of the commodity would likely benefit from fears of inflation.

Portfolio Diversification

Most traders have the vast majority of their assets in stocks and bonds.

Commodities such as iron ore provide traders with a way to diversify and reduce the overall risk of their portfolios.

Ways To Trade Iron Ore

Traders have several ways to speculate on iron ore prices:

Trading MethodOwnershipManagement CostsExpiry DateLeverage
Bullion
CFDs
Futures
Options✅ (if executed)
ETFs/Mutual Funds
Shares

Iron Ore Futures

Futures are a derivative instrument through which traders make leveraged bets on commodity prices.

If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are financially settled.

Trading futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Iron Ore Futures Exchanges

Both the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (“ICE) offer contracts on iron ore futures.

The CME offers two 62% iron content contracts and a third contract based on ore with 58% iron and low alumina. Each contract settles into 500 dry metric tons of iron ore.

The contracts trades globally on the CME Globex electronic trading platform and have a variety of expiration months.

The ICE offers four contracts based on 62% iron content. They are also financially settled, and each contract size is 1,000 dry metric tons.

Iron Ore Options on Futures

The CME offers two average price options contract on iron ore futures.

Options are also a derivative instrument that employs leverage to trade commodities. As with futures, options have an expiration date.

However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts.

An average price option is where the payoff is determined by the difference between the strike price and the average price of the underlying asset.

Iron Ore ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do.

There are no ETFs that are pure-play trades in iron ore. However, there are several popular ETFs that trade more broadly in companies in the industrial metals sector:

SPDR S&P Metals and Mining ETFiShares MSCI Global Select Metals & Mining Producers ETFVanEck Vectors Steel ETF

Shares of Iron Ore Companies

There are many publicly traded companies that have various levels of exposure to iron ore prices.

While trading company shares can be a leveraged way to gain exposure to iron ore prices, many of these companies have some exposure to other metals and minerals.

These shares can react to factors such as regional demand for their products, competition, production costs and interest rates.

Factors such as company management and the overall stock market can also affect these trades:

 Current PriceOverviewListingsFounded
Rio Tinto

UK metals company that mines, processes and markets mineral resources.New York (NYSE)
London (LSE)
Sydney (ASX)
1873
Vale SA
Vale SA Logo
Brazilian company engaged in the production and sale of iron ore and iron ore pallets for steelmaking. New York (NYSE)1942
BHP Billiton
BHP Logo
Australian company that acquires, develops and markets natural resources worldwide.New York (NYSE)1885
Cleveland-Cliffs Inc.
Cleveland-Cliffs Logo
US mining and natural resources company that produces and supplies iron ore.New York (NYSE)1846

CFDs

One way to trade iron ore is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of iron ore and iron ore shares.

The value of a CFD is the difference between the price of iron ore (or shares) at the time of purchase and its current price.

Where Can I Trade Iron Ore

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

If you’re clear on the ways you can trade iron ore, you might be ready to consider a regulated commodity broker. The following iron ore brokers are available in :

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 71.00%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What Drives the Price of Iron Ore?

The price of iron ore is mostly driven by these five factors:

  1. Steel Demand
  2. Chinese Supply
  3. Chinese Demand
  4. Steel Scrap Supplies
  5. Input Prices

Steel Demand

As the nearly exclusive user of iron ore, steel plays an important role in determining iron ore prices.

Steel is used in many areas of the economy, but construction and the automotive sector are the two biggest consumers.

These industries are highly sensitive to macroeconomic factors such as unemployment, interest rates, and GDP.

When the economy is strong, companies need more office buildings, factories require more machines and consumers to buy more automobiles.

Vehicle Assembly Line via Pexels
Vehicle Assembly Line – Image via Pexels

Infrastructure projects play another important role in steel demand.

If the United States embarks on large-scale projects to repair crumbling bridges, railroads and airports, steel demand could rise and iron ore prices could move higher.

Essentially, the health of the overall economy is a good barometer of steel demand, and steel demand determines iron ore demand.

Chinese Supply

The Chinese play an important role in the supply side of the equation for iron ore.

A key factor impacting iron ore output in China is the country’s increasing environmental crackdown on mining.

Poor air quality has forced the government to take a harder look at the industry as a contributor to pollution. This has led to an accelerating rate of iron ore mine closures.

Chinese Iron Ore Extraction And Demand

The remaining iron ore mines in China are mostly low-grade mines that produce ores with only 20 to 30% iron content.

At the same time, China’s demand for steel remains robust. If Chinese iron ore supplies remain constrained, then prices could rise.

On the other hand, if China reopens mines and resumes production, then prices could fall.

Chinese Demand

In recent years, China has been importing over a billion metric tons of iron ore annually to support its steel industry.

A large percentage of these imports come from Brazil and Australia, which have been ramping up production to meet Chinese demand.

An important question for traders is what China is doing with all of the steel it produces.

Chinese Steel Production With Iron Ore

In the past, when domestic demand declined, China dumped its steel at low prices on international markets.

However, during periods of robust growth, China used iron ore to produce steel for its own consumption.

Strong domestic economic growth in China is likely to sustain demand for iron ore, while weak growth could lead to a drop-off in demand and lower prices.

Steel Scrap Supplies

Steel scrap and iron scrap are sources of steel production that compete with iron ore. Therefore, the cost and availability of scrap metal affect the demand for iron ore.

Scrap Metal
Cars Are a Huge Source of Scrap Steel – Image via Pixabay

The automobile industry is a major supplier of scrap steel. In recent years, the scrap industry recycled more than 14 million tons of steel from vehicles.

As this and other industries such as construction grow bigger in China, the supplies of scrap steel could skyrocket. These developments could depress iron ore demand.

Input Prices

Iron ore occurs in rocks that have to be extracted and refined. Mining is an energy-intensive activity that uses large amounts of oil and electricity.

The cost of these and other inputs can influence the price of the commodity.

Should I Trade Iron Ore?

Traders should consider purchasing iron ore as part of a basket of commodities that includes:

Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity.

It also adds overall diversification to a stock and bond portfolio.

There are three specific trends that could raise iron ore prices in the years ahead:

Chinese Demand

China is the top consumer of iron ore, and demand for its use in steel should grow if the Chinese economy rebounds.

Infrastructure Demand

The United States is expected to embark on major infrastructure projects over the next several years. Bridges, railways, airports and other projects require major upgrades.

All of these projects will require significant amounts of steel. Iron ore prices could benefit if these projects move forward.

Mining Challenges

Higher energy costs and pollution concerns make mining an increasingly challenging business.

China’s crackdown on mining and the difficulty of the mining business could lead to more iron ore mines to close or consolidate. This could produce higher iron ore prices.

Risks To Consider In Iron Ore Trading

However, traders should also consider the risks of trading iron ore:

  1. A global recession could weaken Chinese demand.
  2. Abandonment of infrastructure projects in China or the United States could depress demand for iron ore.
  3. Higher US interest rates and a stronger dollar could weaken commodity prices in general.

Further Reading

If you’re not yet comfortable taking the risk to trade iron ore and want to learn more about the raw commodity itself, see our Iron Ore Commodity Guide.

Here are some more Commodity.com trading guides on metals:

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