Forget gold, iron ore is the major commodity delivering bumper returns in 2020.

A key ingredient for steelmaking and seen, along with copper, as a barometer for the health of the global economy, the price of iron ore has surged over 50% this year to trade at $161 per tonne, a nine-year high and well ahead of gold’s 24% return year-to-date. A lot of the gains have been driven this month with the price rising from $124 at the start of December.

Most of the surge comes from recovering demand globally, but particularly China which is the world’s biggest consumer of many metals, iron ore included.

Demand has picked up significantly in the past few months as China’s economy recovers from the pandemic and manufacturing and construction activity expands at a rapid pace. China is set to be the only country in the world to record positive GDP growth this year.

MINERS’ EARNINGS FROM IRON ORE

• Anglo American: $3.4 billion, 34% of total 2019 group underlying EBITDA

• BHP: $11.1 billion, 48% of total 2019 group underlying EBITDA

• Rio Tinto: $16.1 billion, 76% of total 2019 group underlying EBITDA

Source: Anglo American, BHP, Rio Tinto 2019 annual reports

The surging price could boost the profits of some FTSE 100 miners, particularly Anglo American (AAL), BHP (BHP) and Rio Tinto (RIO), which derive significant earnings from iron ore and can dig it out of the ground for under $15 per tonne.

Analysts at Morgan Stanley think iron ore looks ‘increasingly overbought’ compared to fundamentals and trades $50 per tonne above its level, but acknowledge ‘there are few near-term catalysts to drive a sharp correction.’

They highlight that steel production in China remains strong for the time of year (it’s usually quieter in winter) with construction firms making up for delays earlier in 2020, and forecast a gradual lowering of prices in the first half of 2021 to $123 per tonne.

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