Key takeaways

• Commodities such as iron ore are cyclical, with prices influenced by supply and demand dynamics. Interest rates and construction activity are two of the most important demand-side influences.

• Higher demand generally supports prices and sector performance, but outcomes depend on how supply responds, whether external shocks emerge, and the extent to which markets have already priced in expectations.

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Home to an abundance of commodities and a significant number of mining companies, Australia is recognised as one of the world’s most resource-rich economies.

This is reflected in the ASX, where commodities are strongly represented. Hundreds of mining and energy companies are listed, producing everything from iron ore and gold to lithium, rare earths, coal and uranium.

The Materials sector – which includes most commodity producers, excluding energy – consistently ranks as the second-largest sector in the S&P/ASX 200 by weight. As at 29 August 2025, it accounted for 19.1% of the index (see the “Factsheet”).

With global interest rates moving lower and construction activity showing signs of recovery, the question is how these shifts might influence demand for commodities and the outlook for prices.

What drives commodity prices?

The mining industry is cyclical, expanding during periods of strong global growth and contracting when conditions weaken. Prices tend to rise when demand is high and supply is constrained, while downturns often see weaker demand, slower investment, and lower prices.

To explore this cyclical nature, let’s take Iron ore as an example. Prices reached a peak of around US$220 per tonne in mid-2021 during a period of elevated demand, but have since eased to around US$100 per tonne in 2025. 

Several forces contribute to these swings, usually grouped into supply-side and demand-side factors.

On the supply side, iron ore is affected by shipping costs and delays, the level of port inventories, weather disruptions, and operational setbacks that reduce production. The balance between imports and domestic production – particularly in China – also plays a critical role.

On the demand side, global commodity use is shaped by industrialisation and infrastructure investment. China is the world’s largest iron ore consumer, and because iron ore is essential for steelmaking – which supports both construction and manufacturing – changes in China’s activity levels have a major influence on global demand.

These same dynamics, along with additional factors such as geopolitics and environmental regulation, apply broadly across other commodities.

How could lower interest rates support demand?

Monetary policy is one of the most important demand-side drivers because it sets the backdrop for global economic activity. Tighter policy restricts growth, while interest rate cuts are designed to stimulate it.

With central banks lowering rates through 2025 and further reductions expected into 2026, borrowing costs are falling. This environment makes it easier for businesses to finance investment and encourages governments and developers to proceed with infrastructure projects.

Because large-scale projects rely heavily on steel and therefore iron ore, lower rates can create stronger demand and support higher prices, provided supply growth does not outpace consumption.

What role does construction activity play?

Interest rate cuts can lift demand in general, but the effect is especially pronounced when they coincide with stronger construction activity. When borrowing costs fall, governments and businesses are more inclined to fund new projects – from infrastructure upgrades to residential and commercial developments.

China is critical to this picture because of its size; accounting for more than three-quarters of global seaborne iron ore trade, even modest changes in construction activity can shift global markets. In recent years, China’s property sector has faced significant challenges. Lending restrictions left developers under pressure, projects unfinished, and home buyers withdrawing support, triggering a prolonged downturn.

In 2025, however, China introduced stimulus measures and lowered borrowing costs, helping to stabilise conditions. If construction activity continues to strengthen, steel demand could rebound – and with it, demand for iron ore.

Will all commodities benefit equally?

While iron ore often takes centre stage, other commodities closely linked to global growth may also benefit from lower rates and stronger construction. Copper, for instance, is widely used across construction and manufacturing and is frequently viewed as a barometer of economic activity. Growth in demand could also extend to lithium, base metals, rare earths, and even energy and agricultural commodities.

That said, stronger demand does not automatically translate into higher prices. Three considerations are particularly important:

1. Supply responses matter: if producers ramp up output too quickly, the resulting oversupply can cap prices and put pressure on exporter margins.

2. External shocks remain a risk: factors such as geopolitics, trade tariffs, or ineffective stimulus measures can disrupt demand and weigh on performance.

3. Markets are forward-looking: if stronger demand has already been priced in, the potential for further price gains may be limited.

Recent forecasts highlight these uncertainties. The World Bank expects iron ore to decline 13% in 2025 and a further 7% in 2026, with metals and minerals overall down 10% in 2025 and 3% in 2026. It projects aggregate commodity prices to fall 12% this year and a further 5% next year.

Goldman Sachs takes a similar view, forecasting iron ore at US$90 per tonne by Q4 2025 and a further decline to US$80 by Q4 2026.

Together, these projections highlight how unpredictable commodity markets can be. Even when demand conditions appear supportive, investors should remain mindful of supply trends, policy risks, and market expectations. Diversification across sectors, geographies, and time horizons remains an important safeguard.

What does this mean for the ASX?

Because the Materials sector carries significant weight in the ASX, any improvement in commodity demand and pricing could provide a meaningful boost to the local market.

In fact, compared with markets where mining is less influential, Australia could possibly outperform if commodity strength persists. A shift in investor flows from banks towards miners could also increase Materials’ share of the index.

On the other hand, if commodities underperform, the ASX could lag peers such as the US and Europe, where technology, financials and industrials dominate index performance.