Iron ore price rebounds as Australian market dominance continues
China’s plans to lower the price of Australia’s biggest export have been hit by experts saying doomsday forecasts of a “sustained downtrend” in the price of iron ore are “unlikely.”
The price of this valuable steel product fell this month after hitting a record high of over US $ 230 per tonne last month.
China – which buys 60% of Australia’s iron ore – has responded by taking action to quell soaring prices.
Beijing says soaring ore prices are jeopardizing China’s economic recovery from the pandemic, with Chinese businesses and everyday citizens bearing the brunt.
Last month, its National Development and Reform Commission (NDRC), along with four other departments, pledged to severely punish “excessive speculation, price abuse and other violations” which they say have contributed to the rise. prices.
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Regulators would take a “zero tolerance” approach to illegal activity and tighten the regulation of anomalous transactions and malicious speculation, the NDRC said in a statement.
China, via its state media, has said it has the potential to wipe $ 32 billion from the Australian economy by reducing the cost of iron ore, and the first signs in recent weeks show that its strategy could work.
The price of iron ore fell 11 percent in the days following the NDRC meeting a fortnight ago – with some analysts predicting a downward trend.
The latest report from Capital Economics predicted that iron ore prices could drop to around $ 140 per tonne by the end of 2021 and $ 120 per tonne by the end of 2022.
And, NAB’s head of commodities research, Lachlan Shaw, suggested that “iron ore may no longer trade above US $ 200 (A $ 258).”
However, this morning, the CommSec revealed a steep 5.9 percent rise in the price of iron ore – meaning it now sits just below US $ 200 to US $ 198.75 per tonne.
This rebound saw gains for large mining companies in the market today.
The Dalian Commodity Exchange’s benchmark iron ore for September also jumped 45.3 percent to 1,106 Chinese yuan ($ 224.22) per ton. Ausbiz anchor David Scutt pointed out that it was below 1,000 yuan ($ 202.78) just four days ago.
These are only a day’s results so they shouldn’t be read too much, but experts say it’s clear the demand for iron ore and steel won’t go away.
In a note this morning, OCBC Bank provided an incredible statistic that shows how strong Australia’s position in the iron ore market is, meaning China won’t be able to turn its back to Australian mines so soon.
“We estimate that Australia probably shipped around 72 million tonnes of iron ore in May, while Brazil exported around 26 million tonnes. This is consistent with the previous months and suggests that the actual physical demand for the ferrous metal remains intact, ”they said.
“We remain of the view that China’s recent efforts are really aimed at suppressing excessive speculation and not real demand itself. Prices may have come down by eliminating speculation, but a sustained downward trend in iron ore and steel prices is unlikely to occur. “
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However, in a more sober perspective for Australia, MB Fund and MB super chief strategist David Llewellyn-Smith said it was only a matter of time before China cut the ore from Australian iron.
“There is no question of whether China is cutting Australian iron ore,” he wrote in MacroBusiness.
“Only the time has come. As well as what it will do to the Australian economy when it does. “
As “unimaginable amounts of Australian iron ore flood markets outside of China,” global iron ore prices will collapse, writes Llewellyn-Davis.
“China absorbs more than a billion tonnes of iron ore at sea. Australia ships around 700 meters there each year. A significant part of this product will gradually be released to other markets, ”he added.
The biggest blow, however, will be national income – Australia will reap at least $ 150 billion in export earnings this year from iron ore, “almost all” of which will be “wiped out by the combination of iron ore. volume and price pressure ”.
While the impact on our total exports is significant, it indicates that it will remain manageable, likely reverting to the external conditions of 2015.
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“It also gives us a really good guide to what’s going to happen: nominal growth will be reduced; Inflation and wages will be affected for years; The budget will be a sea of red; Mining stocks will fall; Bond yields will fall; The AUD is going to crash, ”Llewellyn-Davis warned.
On top of that, Australian home prices would ‘fall’, ‘devaluing drastically against the world via the currency collapse’.
“How long would that last is the more interesting question. Assuming the AUD can continue to fall without creating inflation, there is no obvious immediate limit to this, ”he said.
– with Natalie Brown