Drop in Iron Ore Hitting Mining ETFs

Iron ore continued its decline today dipping below $70/dry metric ton, a price it has not seen since 2009. The decline in price is due to an increase in supply from Australia and Brazil, the two largest global exporters and weakening demand from China, the world largest consumer of the commodity.

This latest move has the price heading for a 13 percent loss so far in November. Chinese iron ore demand has slowed simply due to the slowing of their overall economy. The cutting of interest rates by China’s Central Bank last week for the first time since 2012 paints a bleak picture for China’s economy in the short-term. The price of iron ore will likely continue to decline until a robust pickup is seen in the Chinese economy.

Highlighted below are two ETFs that have been affected by the decline in iron prices and are attempting to find a bottom.

The Market Vectors Steel ETF SLX follows 28 publically traded companies involved in the production of steel products or mining and processing of iron ore. The ETF is distributed across nine countries with the United States at 38 percent and Brazil at 21 percent being the most heavily weighted countries. The top individual holdings include Rio Tinto Plc RIO at 14 percent, Vale Sa VALE making up 12.9 percent, and Posco PKX coming in at 6.4 percent. The falling price of Iron ore has had a direct impact on the performance of the ETF. Year-to-date the ETF is down 17 percent and 13 percent over the last six months. Last week the steel ETF hit its lowest point in 16 months. The ETF has an expense ratio of 0.55 percent.

The SPDR S&P Metals and Mining ETF XME consists of 41 U.S. publically traded companies that are involved in the metals and mining sector. The ETF is distributed across seven sub-sectors with steel at 41 percent, coal and consumable fuels at 18 percent, and diversified metals and fuel at 16 percent. The top holdings include Consol Energy Inc CNX making up 3.8 percent of the ETF, Alcoa Inc AA with a 3.7 percent holding, and Compass Minerals International Inc CMP coming in at 3.6 percent. XME is down 16 percent year-to-date and 12 percent over the last six months. The metals and mining ETF has an expense ratio of 0.35 percent.

It appears Chinese iron ore demand is finally slowing after helping producers around the world generate record profits since the early 2000’s. Due to the massive oversupply that is currently available it is hard to predict where iron ore will find a bottom. One would have to assume that it will stabilize at some point in the future, thus providing a favorable opportunity for investors that are willing to wait for a bottom to form.