Iron ore industry: high prices to continue in 2017?

Over the past 12 months, the price of iron ore has skyrocketed and, in turn, delivered a change in fortunes for the industry's biggest players. For example, Vale shares posted a monumental 130 per cent gain in 2016, while competitors Rio Tinto and BHP Billiton also enjoyed similar gains.

This is in stark contrast to the previous five years, where the iron ore price reached rock bottom. While this came as bad news for miners, it represented a chance for traders to capitalise on cheap shares and substantially increase their investment.

However, does this mean the opportunity to back iron ore is already over, or are there opportunities for this commodity to rise further in 2017?

The story of iron ore between 2011-2016

At the start of 2011, the price of iron ore peaked at over $190 per metric tonne. However, the next five years would see prices plummet downwards and by 2016, it had reached an all-time low of around $40 per metric tonne. Therefore, it is no surprise that the share price of Vale, Rio, and BHP also spiralled out of control. In fact, Vale's stock fell more than 90 per cent during this time.

But then the tables turned. Demand from China, which produces roughly the same amount of steel as the rest of the world combined, meant that iron ore prices doubled between January and December 2016. This was particularly good news for Vale, as it sent roughly 55 per cent of the iron it produced in the third quarter to China. Rio and BHP followed suit, posting impressive gains of 32 per cent and 38 per cent respectively.

However, this doesn't mean to say that the price of iron ore will remain high. Not only has growth in China begun to decelerate, there are plans in place to shut down its least efficient steel mills in order to reduce pollution and overcapacity.

This is something Rio Tinto warned in mid-2016, just as iron ore prices were soaring: "Growth in China has stabilised, but it is on a long transition path of slower and less commodity-intensive growth."

The uncertain future of iron ore prices

Ahead of China's New Year holiday, which gave workers a week-long break, a number of steel mills built up their inventories. What's more, they also favoured high-quality iron ore over more expensive metallurgical coal. So, by bringing demand forward, China may have boosted iron ore prices in the short-term.

One potential long-term issue is that production could outstrip demand once again, which was apparent during the iron ore industry downturn. This is a distinct possibility for Vale, as it currently brings production up to speed at a low-cost S11D project site in Brazil, where output could rise by as much as 10 per cent. Elsewhere, BHP and Rio are expected to increase production to the low- to mid- single digit percentages as well.

Therefore, all eyes are on China to see whether its growth rate will continue to slow. But, in spite of a strong rise last year and long-term industry trends, capacity increases from Vale, BHP, and Rio could signal an early demand surge for iron ore in 2017 and better news for investors.