Why Brexit Will Not Significantly Impact Iron Ore Prices

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The ‘leave’ outcome of the UK’s EU referendum has created jitters in financial markets around the world. However, the event is unlikely to have any lasting impact upon iron ore prices with the EU being a minor player in determining the global balance of demand and supply of the commodity. Iron ore is used as a raw material in the production of steel. Thus, steel production by a particular geography is a fairly good approximation of the demand for iron ore from that region. As illustrated by the table shown below, the EU (including the UK) accounts for only around 10% of global steel production (with the UK accounting for less than 1% by itself), implying that it is minor player as far as the global demand for iron ore is concerned.

Brexit Iron Ore

As per estimates by Goldman Sachs economists, the worsening of the terms of trade between the UK and the EU post Brexit would negatively impact EU and UK GDP by around 0.5% and 2.75% respectively. [1] Taking into consideration the relatively muted economic impact of Brexit on countries that in any case only account for around 10% of global steel production, the event is unlikely to materially impact the global demand for iron ore.

Considering the supply side of the equation, Australian and Brazilian iron ore producers together account for over 80% of the supply in the worldwide seaborne iron ore trade, which could rise to as high as 90% due to rising production from these countries. [2] The EU has a negligible presence in the seaborne iron ore trade, which determines benchmark iron ore prices. Thus, any economic disruptions as a result of Brexit will not significantly affect either the demand or the supply for iron ore. Brexit is largely a non-event for iron ore prices.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rio Tinto
Notes:
  1. Brexit Aftermath: Goldman Sachs Predicts U.K. Will Enter A ‘Mild Recession’ In 2017, Forbes []
  2. Iron ore price: Seaborne trade is Opec on crack, Mining.com []