If you want to learn about how exports and imports for a key raw material can cause its price to surge, one case you can observe is the robust demand for – and sharp rally in – iron produced by Australia. Since iron is a component used to produce a wide array of goods, market participants use futures to hedge the cost they will have to pay for the raw material.
Surging Chinese demand
Most the iron produced by Australia goes to China, and the demand of the Asian nation has caused the metal to surge 77 percent in price to reach $153.90 per ton during the week starting January 7 after hitting its recent low in September, according to Reuters.
Producing and exporting iron is a major business in Australia, generating more than A$60 billion per year in the Land Down Under, the media outlet reports. The recent surge in the price of the metal will help generate higher tax revenue, create more robust profits and also encourage more investment.
"The marked rise in iron ore values coupled with higher export volumes should give a double boost in December, so this looks like being the worst of the deficits," Michael Workman, a senior economist at Commonwealth Bank of Australia, told the news source. "The deficits could halve from here if prices stay remotely near where they are now."
Bloomberg reports that as the mining industry makes further recovery, Australian Prime Minister Julia Gillard becomes more likely to hit her goal of generating a budget surplus for the year.
"It does put a surplus back in play," Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd., which has more than A$126 billion ($132 billion) under management, told the news source. "That's important for the government politically as the debate has come down to 'in surplus good, in deficit bad,' which is unfortunate because it ignores the fact that Australian finances are in good shape."
Most of the nation's exports of these metals go to China, where market experts have predicted that economic growth will hasten in 2013, according to Bloomberg. A poll conducted by the media outlet in November indicated that the 862 traders, investors and market experts who subscribe to Bloomberg expressed their confidence in the world's second-largest economy had surpassed its highest in more than a year.
The media outlet reports that this sentiment has surged as many market participants expect that a new Chinese government regime led by Xi Jinping will accelerate the nation's current economic expansion through the use of policy initiatives. Xi is currently on track to take over the position of president held by Hu Jintao, after being elected general secretary of the ruling Communist Party in November.
The median estimate of economists who took part in a poll conducted by the media outlet indicated that while China's economy grew at a rate of 7.7 percent in 2012, it will expand at a rate of 8.1 percent in 2013.
Accelerated growth in this major consumer of iron could combine with market participants concerned about the impact of cyclones to push prices for the metal higher, according to the news source.
"Even though there's no cyclone scare, there is the specter hanging over the market. Buyers of iron ore are just a little edge at the moment," Joel Crane, research analyst with Morgan Stanley Australia Ltd., told the media outlet.
If you want to learn more about hedging the cost of iron, you can obtain free futures trading education at TradingPub, which gives you the opportunity to interact with some of the top traders and investors in the industry.