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January 31, 2017

A Dynamic Commodities Exclusive

Steel is a ferrous metal, it contains iron. The first traces of steel ironware date back over 4,000 years to Turkey. Sickle-shaped weapons from the fourth century BC have turned up on the Iberian Peninsula and Nordic steel was weaponry of the Roman Empire.

Steel is one of the critical building materials for modern infrastructure. Steel is an essential commodity when it comes to the manufacturing of cars, ships, pipelines, machinery, tools, appliances, and rebar is critical in building construction.

The production of steel begins with iron, a commodity found in the crust of the earth. Iron ore is a commodity that trades on some futures exchanges around the globe. The most liquid markets for iron ore futures are in China. Iron ore contains carbon, iron and other elements. To produce steel, iron ore goes into a blast furnace and the resulting material is pig iron which is 2-4% carbon. Pig iron is then further refined into different grades of steel. China is the world’s leading steel producer and the European Union is second. Other major steel producing nations are Japan, the United States, India, Russia, and South Korea. Infrastructure building and rebuilding requires steel.

The Trump Administration in the United States promised a massive infrastructure rebuilding program in the United States during the 2016 campaign. After his election as the forty-fifth President of the U.S., President Trump has continued to pledge to follow through on his promise, proposing initiatives that will rebuild roads, bridges, tunnels, airports, and other outdated infrastructure in the U.S. in the years ahead. The construction of a security wall along the southern border of the U.S. will also require steel.

The price of iron ore, the key ingredient in steel, was trading below $40 per ton in early 2016. By early 2017, the price had doubled. The market perception is that demand for the basic building block commodity will grow over coming years.

In many ways, the price of iron ore and steel are bellwethers for the growth of the global economy. As economic activity increases around the world, the prices of these commodities tend to move higher.

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