Iron-ore prices have soared by more than 68% this year, a resurgence driven by falling supplies that has led to challenging times once again for steel mills that use the material.
As steel's main ingredient, iron ore is one of the world's most traded commodities and can influence prices for materials used in everything from cars to skyscrapers. The global steel industry uses roughly 2 billion metric tons of iron ore, along with metallurgical coal and recycled steel, to make 1.7 billion tons of crude steel each year, according to industry group the World Steel Association .
Iron ore is one of the best-performing assets year to date. Last week, the price hit $126.35 a metric ton, up from roughly $73 at the start of 2019 and its highest level since January 2014, according to S&P Global Platts.
In China, the raw material's recent rally is particularly painful—so much so that the country's steel companies have urged government officials to try to calm the market. Concern that China will step in to curb prices caused a more than 6% tumble on Friday, although the market bounced back to $122.60 a ton by Tuesday.
This year's surge in iron ore has been primarily linked to shrinking or stagnating supplies from the mining hubs of Australia and Brazil. In Brazil, Vale SA , historically the industry's top exporter, had to cut output following a deadly dam collapse in January. In Australia, miners have faced operational setbacks from weather and fire damage.
That has occurred against a backdrop of booming steel production. Output in China, the world's No. 1 steelmaker and consumer, rose 10% in the first five months of 2019 versus a year ago. U.S. production was up 6.2%.
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Fears of intervention by Chinese authorities flared recently after a representative from the nation's steel industry group called for an investigation into the iron-ore sector. Chinese steel companies' profits fell by 18% in the first five months of the year because of rising costs, the group's vice chairwoman said on Friday, according to the government-run Xinhua News Agency .
Many steelmakers world-wide are reporting their margins are being squeezed by climbing iron-ore costs, although the impact varies depending on how much iron or steel scrap they use.
U.S. Steel Corp . said last month it was struggling with rising raw material costs in Europe as it idled one furnace there and two in the U.S.
Certainly, global steelmakers are better prepared for the storm than they were in past commodity cycles, after a vigorous productivity drive in recent years.
Meanwhile, iron-ore producers have also sharply cut costs—meaning they are benefiting greatly from booming prices for their products.
Rio Tinto , one of the world's top exporters of iron ore, says every $10-a-ton move in the iron-ore price generates an extra $2 billion in free cash flow for the miner, which sells some of the most profitable iron ore in the world and relies on the market for the bulk of its earnings. Its share price is around its highest value in more than a decade.
Iron-ore stockpiles held at China's ports have been shrinking fast, and some analysts think prices could go higher still if inventories slip further. Stockpiles are now down to roughly 115 million tons, implying a little under four weeks of cover for steelmakers there.
That has worried traders, given it takes a number of weeks for shipments to arrive from Australia or Brazil.
"The last time we got to 3 weeks of cover, iron-ore prices ran to $140 a ton," Citigroup said in a recent client note.
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Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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