Price Volatility – Opportunity or Danger?

The iron ore market is undergoing a fast change. The development of the spot market is causing a stir amongst iron ore producers, steelmakers, and various manufacturers, as they seek either to resist the change or to work out the best strategy. These recent movements beg the question as to whether or not price volatility is something to be welcomed.

The move to trading iron ore on the spot market will herald the kind of price variability which much of the commodities markets – gold and oil being prime examples – have experienced for years. Brokers, banks and institutional investors obviously crave such things, since volatility creates the opportunities for big gains.

The same cannot be said for much of the physical side. Steelmakers that I have spoken to express serious reservations about the various financial instruments which are now infiltrating the iron ore market. With their chief input cost becoming increasingly volatile, some steelmakers feel they have no choice but to pass on this variability to their buyers, which could in turn mean consumers have to pay more for vehicles and other steel-based products.

Those in the financial services industry would of course argue that this represents an opportunity. The development of the spot market means miners can hedge and therefore lock in the value of their projects, whilst steelmakers can minimize their risk using these techniques.

Ultimately the need is for both sides of the debate to come together for a discussion, which is why investors and miners are coming together at the World Mining Investment Congress 2011 to discuss how to capitalize on volatile commodity markets.