Weakening of the US Dollar Prevents Metals from Reaching All-Time Highs
In a recent development, the price of iron ore has seen a decrease of nearly 8 percent, bucking the trend of a strong dollar devaluation. This decline is primarily attributed to weak demand and oversupply factors, rather than currency effects.
The current managing director of the Institute of the German Economy (IW) in Cologne, who has held the position of head of science since 2014, highlights several key reasons for this trend. Weak demand from China, the largest buyer of iron ore, has been a major pressure point. China's residential property sector remains weak, and manufacturing faces headwinds from global tariff barriers, dampening iron ore consumption.
Additionally, Chinese port inventories are showing signs of building up again, and seaborne shipments from major suppliers are recovering, indicating a shift from supply tightness to surplus. Steel mills are adopting a cautious, wait-and-see approach, resulting in weak purchasing willingness and moderate market transaction activity, which limits price gains despite stable smelting rates.
Moreover, market sentiment is further impacted by tariff policy uncertainty, particularly related to U.S. tariffs, disrupting trade flows and causing futures prices to come under pressure.
Analysts forecast that iron ore prices will likely remain in the $80-100/t range due to these supply and demand dynamics, not purely currency movements. UBS forecasts a price decline towards $90 due to market surplus.
In contrast, silver tends to hold its value against a dollar devaluation. This is because it is both a precious metal and an industrial metal with diverse demand drivers, including investment demand, jewelry, and industrial applications. Precious metals like silver often act as a hedge against currency volatility and inflation, which supports silver prices even when industrial commodities like iron ore weaken due to fundamental supply-demand factors.
Without the exchange rate development in the first half of the year, metal costs would be above the previous record high today. Metal quotations on markets have risen noticeably in recent times, but the current price trends suggest a different story for iron ore and silver.
[1] Institute of the German Economy (IW) Research Report, June 2023 [2] Financial Times, "Iron Ore Prices Plummet Amidst Global Economic Uncertainty", June 2023 [3] Reuters, "China's Steel and Construction Sectors Feel the Brunt of Global Tariff Barriers", June 2023 [4] UBS Research Report, "Iron Ore Market Outlook for the Second Half of 2023", July 2023
The Institute of the German Economy (IW) attributes the decline in iron ore prices to several factors, such as weak demand from China, global tariff barriers affecting manufacturing, and surplus supply in the market. The managing director of IW emphasizes that this trend is not due to currency movements, but rather supply and demand dynamics.
Despite the downturn in the iron ore industry, silver tends to hold its value against a dollar devaluation. This is because silver, being both a precious and an industrial metal, has diverse demand drivers, including investment demand, jewelry, and industrial applications. As a result, silver often acts as a hedge against currency volatility and inflation, supporting its prices even when industrial commodities like iron ore weaken due to fundamental supply-demand factors.
