$70 iron ore inevitable

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The AFR‘s Angus Grigg has a piece today that may seem a little behind the times but it’s not:

China faces three major problems and overcoming any of them will be negative for iron ore.

First, the country has had a rapid expansion of credit, which if not contained will threaten the banking system. This easy credit has allowed uneconomic steel mills to keep producing, even as their losses mount.

…China is left with more than 1 billion tonnes of steel-making capacity, compared with production last year of 779 million tonnes and consumption of 730 million tonnes.

…Yet, these two issues are dwarfed by the environmental challenge facing China.

The piece describes the recent panic with one choice quote in particular:

“Every metric except hope says the price will go lower,” says one London-based trader.

He’s tipping iron ore will hit $US70 a tonne this year and cites the correlation with coking coal, a key steel-making ingredient.

…The argument is that coking coal has for much of the past decade traded at a 50 per cent premium to iron ore.

But even with the big price drops of the past week the two commodities remain near parity.

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This is still possible. The outlook is completely dependent upon more stimulus and if the Chinese are good to their word, it won’t come. As Grigg says:

 …if it panics and loosens credit then steel demand from the property sector should pick up again.

But there is a bigger point in play here. The large Aussie miners have long said that those willing the iron ore price lower are betting against China.

In the past this may have been true, but is no longer the case, as China has begun the long task of de-coupling its growth from steel demand.

And so the health of China may no longer be measured in the buoyancy of iron ore prices.

Exactly right. The iron ore dream is over. Whether it’s this month, this year or next year, $70 iron ore is coming.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.