Strait of Hormuz disruption raises iron ore costs

Executive summary

The closure of the Strait of Hormuz is causing vessel supply to tighten globally through indirect mechanisms, such as war risk surcharges and insurance withdrawal. The disruption of the strait, through which around 20% of global oil and LNG transit, has triggered a cascading shock to energy-intensive industries. This has sharply increased dry bulk shipping rates, with the Baltic Dry Index up 13% since the war with Iran started on Feb. 28, and has exerted further pressure through higher fuel costs, rerouting and reduced vessel availability. Our scenario modelling quantifies this impact, revealing a potential $5.76 per dry metric ton (11.3%) increase in the global iron ore cost base, driven primarily by shocks to shipping and energy.

The Take

• The Middle East war is a stress test for the iron ore supply chain's energy cost assumptions.
• Duration is everything: a short shock is manageable; a prolonged closure of the Strait of Hormuz changes the economics of seaborne iron ore trade.
• The surge in energy and freight costs will widen the gap between integrated, hedged majors and exposed independent miners, potentially accelerating market consolidation.

Oil and diesel – the mobile fleet cost surge

The operational costs of open-cut mines are set to rise significantly because the heavy equipment used, such as haul trucks and excavators, is almost entirely dependent on diesel fuel. The conflict has directly impacted fuel markets, causing Brent crude oil prices to jump about 50% and pushing diesel futures to their highest levels in years. As a result, diesel prices have increased by 30 cents per gallon, with some locations experiencing even more severe price hikes.

Natural gas and electricity – the processing cost shock

The war is also triggering a processing-cost shock via the electricity market. In most grids, natural gas sets the marginal price of power, so the shutdown of key facilities such as Ras Laffan — which caused European gas prices to surge nearly 40% in a single day — has an immediate knock-on effect. This directly inflates costs for electricity-intensive iron ore processes, such as crushing and magnetic separation, creating acute pressure for miners in exposed regions, such as Europe and Asia, while more insulated markets like Australia are less affected.

Modelling a cost impact scenario: assumptions and inputs

To quantify these impacts, our updated scenario model assumes a near-term 13% increase in freight rates, an 18% rise in diesel costs and a 15%-40% surge in electricity costs, depending on region. This is compared to our consensus forecast scenario for 2026.

The results show a significant 11.3% increase in the global cost of iron ore to $56.57/dmt from $50.81/dmt. This is the direct result of a major supply chain shock triggered by the latest war. While iron ore is not a primary commodity from the Gulf States, its cost structure is highly exposed to energy and logistics markets that have been severely disrupted. The largest increase in cost comes from shipping, with an average increase of $2.12/dmt. While some major producers with their own shipping fleets might be largely immune, this will impact smaller producers.

Minesite costs are also set to increase significantly, as they are most directly exposed to rising oil prices using diesel mine equipment, such as haul trucks. Specifically, the surge in oil prices is forecast to raise global mine costs by $1.54/dmt through higher diesel expenses alone. The remaining increases are due to natural gas and electricity increases impacting the processing and inland transportation costs, and pelletization costs.

China's steel demand could soften if higher energy costs affect manufacturing. Supply-side tightening may support the iron ore price, providing a partial natural hedge for integrated miners. Mid-tier and independent miners without price hedging or energy contracts are the more exposed participants.

How the Strait of Hormuz Disruption Affects Iron Ore Costs

Energy Driven Cost Pressures

Open‑cut iron ore mining is highly dependent on diesel‑powered mobile equipment. The conflict has driven a sharp increase in oil prices, with diesel futures reaching multi‑year highs. As a result, global mine‑site costs are forecast to rise materially, with diesel alone adding $1.54/dmt to average production costs under the scenario model. 

Electricity and Processing Impacts

Electricity costs are also rising as natural gas prices surge, particularly following disruptions to key LNG facilities. In many regions, gas sets the marginal power price, amplifying cost pressure on electricity intensive iron ore processes such as crushing, magnetic separation and pelletisation. Exposure varies by region, with Europe and parts of Asia more affected than relatively insulated markets such as Australia. 

Shipping and Logistics Shock

Higher fuel costs, war‑risk insurance premiums and vessel rerouting have tightened dry bulk supply, pushing the Baltic Dry Index up 13% since the conflict escalated. Shipping represents the single largest contributor to the projected iron ore cost increase, adding an average $2.12/dmt globally.

Scenario Modelling: What the Numbers Show

S&P Global Market Intelligence’s updated scenario assumes:

• A 13% increase in freight rates
• An 18% rise in diesel costs
• A 15%–40% increase in electricity costs, depending on region

Under these assumptions, the global iron ore cost base rises from $50.81/dmt to $56.57/dmt. The modelling highlights iron ore’s indirect exposure to geopolitical energy shocks, despite limited direct trade links with the Gulf region. 

Market Implications to Watch

• Producer divergence: Integrated miners with owned fleets and energy hedging are better positioned to absorb cost shocks, while independent producers face margin compression.
• Potential consolidation: Sustained cost pressure could accelerate consolidation across the iron ore sector.
• Demand dynamics: Higher energy costs may soften steel demand in energy‑intensive manufacturing regions, although supply‑side tightening could partially support iron ore prices.

Does iron ore pass through the Strait of Hormuz?
No. Iron ore shipments do not typically transit the Strait of Hormuz, but the commodity is indirectly exposed through global energy and shipping markets that rely on the waterway.

Why does the Strait of Hormuz matter for iron ore prices?
The strait is critical for global oil and LNG flows. Disruptions increase fuel prices, insurance costs and freight rates, which raise iron ore mining and shipping costs worldwide.

How much could iron ore costs increase due to the conflict?
Scenario modelling by S&P Global Market Intelligence indicates a potential 11.3% increase in the global iron ore cost base under current disruption assumptions.

Which iron ore producers are most exposed?
Producers without energy hedging, long‑term freight contracts or owned shipping fleets are more exposed to rising costs than integrated majors.