It may not have been long ago that Tom Price’s forecast of a $70 iron ore price in the September quarter of this year would have been laughed at. But last year’s tumble has put paid to that. As regular readers will know I have been forecasting my own second half rout for iron ore spot so its interesting to examine someone else’s reasoning. First, Rusty versus China property crackdown:
…media + investors are struggling to balance impacts of these two industry events: potential macro-shift in China vs. an epic supply-constraining storm in Iron Ore World, downtown Australia.
…reality is, ‘Rusty’ will pass over within days; may result in some days (not weeks) of loading delays; but these will likely be so minor as not to register in reported exports (company/ABS); any lost tonnes should be recovered by the industry within weeks/months.
…but China’s potential policy shift matters more
- therefore, we’ll all soon get back to worrying about: 1. how China’s central govt could move to stamp out price buoyancy in national property sales; 2. how much this is likely to hurt steel + iron ore demand growth.
- but newsflow-to-date suggests departing Wen Jiabao (i.e. incoming Li Keqiang won’t formally step-up until March) is only moving here to moderate the current lively trade in the property sector – rather than annihilate all sector activity, at the risk of impairing broader economic growth.
Plus seasonality and the supply deluge:
- we’ve observed that like all CYH1 spot trades since the 2010 termination of the long-standing annual ‘benchmark’ pricing culture – 2013H1 so far appears to be another period of spot price stability (Iron Ore: explaining spot price volatility, 21-Jan-13).
- what normally happens in CYH1? once restocking commences, an ‘acceptable’ range for the trade’s various spot signals is established; it remains intact until season ends (about June); post-season, buyers withdraw from trade; liquidity weakens; spot signals fall. equity implications?- we think only upside risk now relates to a lack of Indian ore => trade virtually collapsed Dec-12 (political dramas) => this event has transferred greater spot pricing power to Australia in the Asia trade => may create price-spike events in coming months => attractive to hedge funds;
- next big move? price weakness in 2013Q3, when steel production rates across Asia moderate + raw materials buying eases; Q3’s weakness will be exaggerated this year because of an Australian-led supply-lift (Rio Tinto + FMG; Global I/O: Mining & Metals – Iron Ore: a game of 2 halves, 31-Jan-13).
- since spot prices fell to US$88.5/t cfr in 2012Q3 (7-Sep) on trade’s seasonal weakness alone, this year’s corresponding supply lift threatens an even lower spot price outcome (need a number? try US$70/t cfr fines).
- note, UBSe 2013Q3 avg is a higher US$113/t fob (+7-10/t for freight; Snakes and ladders, 11-Dec-12); 2013H2 = US$110/t fob.
I personally think that with Indian ore out of the market effectively for good $70 is too low (God help us if Indian exports resume mind you). But a repeat of last year’s pricing range would be no surprise at all. More to the point, China saved iron ore last year with its push through of renewed infrastructure spending. Will it do so again?
If this forecast transpires, it will coincide with the peak in the mining investment boom meaning just one thing for the Australian economy: recession in 2014.
Who could argue with an iron ore analyst called Tom Price?!
Could be 70, could be 90, could be 120, could be 145. The price will moderate and find a new normal, until that too changes.
The majors are improving productivity cognizant of need to remain low-cost producers.
If 70 is it (I’ll go ave $130), big trouble in little China for many: some producers, ToT, MRRT, Australia.
The price will moderate and find a new normal, until that too changes.
No sign of moderation recently, all I’ve seen is increasing volatility.
Makes it tough to run an economy where your #1 export earner swings wildly between $80 and $150. And as other export sectors weaken further, our dependence on one commodity sold to one customer intensifies.
Big mining tax + SWF anyone?
That is more an argument NOT to have a big mining tax, particularly if volatility is your concern. Anyway at AUD70 there won’t be a Big Mining Tax and nor should there be.
No it isn’t. If you had a clear head you would know that said tax/SWF would smooth the income impacts upon the economy by taking gains out and adding when falls come.
Moreover, given Rio is projecting a cash cost for ore in the mid 20s, a 250% margin makes a $70 threshold rent tax generous…perhaps $50 would be more appropriate.
You will note I did not mention SWF…
oh, silly me, I see you were implying the proceeds from the Big Mining Tax would be sequestered to the safety of a SWF.
Not in this country.
It’s not in the 20s yet. 70 would damage many other Australian miners and I don’t think you would want to see that.
There might be a little bit of teasing in my comment.
“Big mining tax + SWF anyone?”
We would need some adults to manage all that.
Too late for that now. We are nearing the mining investment peak here and possibly FAI peak in China.
Glencore chief is right – we should have moderated the mining investment over a longer horizon. Mining tax was one way of achieving that. Sadly, its all water under the bridge now.
Makes it tough to run a resource company – especially when you have to deal with the inherent commodity price volatility in conjunction with political interests manipulating the tax regime on whim.
Chuck in a few other hindrances while you’re at it
http://www.smh.com.au/business/gina-rinehart-loses-stake-in-rhodes-ridge-20130227-2f5p0.html
And today’s award for stating the bleeding obvious goes to…
The mining execs will be alright mate.
Could see a short to medium term price hike if Rusty leaves a legacy.
The good thing about it is that there is no political imperative to rescue mining companies because they are such small employers of voters once they reach production.
I would assume that most of the loans are direct from offshore banks, so a loss to banks might not be of that much concern to domestic politics either.
As China eventually rebalances away from Fixed Asset Investment and labour costs rise, will India fill the gap by modernising/industrialising?