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Iron ore costs have hit multi-year highs because the demand for infrastructure investments will increase

The National Development and Reform Committee announced that we are ready to launch iron ore futures in Beijing, China.

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Iron ore prices soared to multi-year highs this week as Chinese government incentives spur infrastructure build-up and boost commodity prices even amid a global pandemic.

Spot iron ore prices rose to around $ 130 per ton of dry matter on Tuesday, according to commodity price reporting agency Argus. This is the highest level since 2014.

"Stimulus measures in China and other countries have made a decisive contribution to the revival of economic activity and thus the demand for raw materials," wrote ANZ research strategists Daniel Hynes and Soni Kumari in a report on Wednesday.

The continued spike in iron ore prices is due to the price of the steel-producing ingredient falling to a low of $ 80 per tonne in March.

The strong gains come after Beijing pumped hundreds of billions of dollars in fiscal stimulus into its economy to recover from the coronavirus pandemic. Much of these incentives would go to infrastructure.

In July, China imported a record 112.65 million tons of iron ore, up 24% year over year and up 10.8% over June, according to customs data.

According to Reuters calculations, China imported 11.8% more iron ore in the first seven months of this year than in the same period in 2019. China also produced a record amount of crude steel in July.

"Bulk goods continue to benefit from infrastructure investments in China. Steel production was surprisingly strong and an improvement in steel mill margins should keep production stable in the short term," said the ANZ strategists in their note. Depleted iron ore supplies also help, the bank added.

Supply Concerns to Brazil

Iron ore prices are also being supported by concerns about Brazilian supply as the main producer is also a coronavirus hotspot. A dam disaster in 2019 had also hit the supply.

"Ongoing concerns over Brazil's iron ore supply as coronavirus cases and deaths continue to plague the country's mining regions have driven iron ore prices up along with strong Chinese demand as steel production began to spike with the country's V-shaped recovery "Fitch Solutions said in a report dated Aug. 14.

The rebound in iron ore prices, however, could not be sustained, ANZ said. "We will see iron ore prices normalize as soon as the seasonal slowdown in construction begins," the bank's strategists said in another report on Aug. 12.

Fitch Solutions expects prices to stay high through 2021 before falling slightly.

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