How might the conflict in Ukraine impact the iron ore price?

One steelmaker is already looking for alternatives…

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Key points

  • The price of iron ore is sitting around US$136.50 per tonne
  • Nippon Steel is starting to assess its options for iron ore pellet supply outside of Ukraine
  • The trend in share prices among ASX-listed producers is not unified

A message from our CIO, Scott Phillips:

"G'day Fools. If you're like us, you're dismayed by the events taking place in Ukraine. It is an unnecessary humanitarian tragedy. Times like these remind us that money is important, but other things are far more valuable. And yet the financial markets remain open, shares are trading, and our readers and members are looking to us for guidance. So we'll do our best to continue to serve you, while also hoping for a swift and peaceful end to war in Ukraine."

————           

Volatility in the iron ore price is expected to continue as the frightening situation in Ukraine pushes onwards. This leaves investors wondering how might a prolonged conflict affect the price of the steelmaking commodity.

Since November, iron ore has swung dramatically between ~US$92 per tonne and US$150 per tonne. More recently, prices have cooled off and returned to US$136.50, where it sits now.

What does curtailed iron ore supply mean for prices?

The market for iron ore is a large one — estimates put the figure somewhere around 2.3 billion tonnes in 2021 alone. Notably, Australia is the largest producer of the commodity — with companies such as Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP) digging up the bulk of it.

In comparison, Ukraine and Russia's contribution to iron ore supply is relatively small. However, in the world of supply and demand, even slight disruptions to the equation can play out in the iron ore price.

In specific terms, Ukraine usually shovels around 40 million tonnes of iron ore into the market each year. Likewise, Russia typically adds around another 25 million tonnes per year.

Running some quick numbers, the two countries currently involved in a conflict make up close to 3% of the global iron ore supply. And it appears the situation is already beginning to have an impact on the market.

For example, one of the world's largest steel producers — Nippon Steel — is assessing alternative high-grade iron ore pellet suppliers. The reason is, Ukraine makes up 14% of imports for the more premium form of raw iron ore material. Reportedly, the steelmaker is eyeing off a new supply from Brazil and Australia.

The demand shift into a more constrained supply could give rise to a higher iron ore price. However, analysts at Macquarie Group Ltd (ASX: MQG) are mindful that nearly 158 million tonnes of ore are sitting in port inventories.

How are producers holding up?

Despite a potential tailwind in the near term, the recent trajectory from ASX-listed iron ore companies has been divided. For instance, here's how some of the largest players performed over the past month:

  • Rio Tinto — up 8.5%
  • BHP Group — up 4.7%
  • Fortescue Metals Group Limited (ASX: FMG) — down 8.6%
  • Mineral Resources Limited (ASX: MIN) — down 21.2%

Potentially investors are taking into account Macquarie's estimates of a US$100 iron ore price by the end of the year. Though, the unpredictable events playing out in Ukraine throws a spanner into the works of forecasts.                                           

Motley Fool contributor Mitchell Lawler owns Macquarie Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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