From Westpac’s Robert Rennie:
Last week’s iron ore quarterly production data from Australia’s ‘big three’ miners proved to be something of a mixed affair. As the first chart below notes combined WA iron ore production from BHP, Rio and FMG came in at 127mt, down from 131mt in the previous quarter. This represents a 2.9% drop in production versus the 4th calendar quarter of 2013. This took the annual rolling sum of Australian iron ore production to a fresh record high of 520mt.
Ordinarily, this might be a source of concern for some. However, iron ore production in Australia tends to be significantly impacted by weather and Q1 has the largest seasonal coefficient (seasonality present at 0.1% level/ no evidence of moving seasonality at the five percent level). FMG noted an 8% drop in production was largely driven by “the impact of seasonal wet weather on production and a focus on working capital management”. Rio noted that “production in the first quarter was below fourth quarter levels due to disruption caused by seasonal weather patterns”. So clearly Q1 2014 was significantly impacted.
In order to remove this impact, we need to observe Australian iron ore production on a seasonally adjusted basis. Chart 2 below plots the outcome of this process and confirms Australian iron ore production actually rose by 5.5% on the quarter to a fresh record high of 137mt.
Guidance from Australian iron ore miners suggests that domestic production will continue to rise strongly through 2014 and into 2015. Indeed current guidance suggests the ‘big three’ will be producing at an annualised rate of 642mt by end 2014, 23% above the current 520mt level. This in turn implies that Australian iron ore exports will continue to grow significantly through 2015. Bottom line, Q1 data should not be read as anything other than a continuation of the rapid pace of increase in Australian iron ore production that will continue through the next year.
I’m not sure that was ever in doubt. In the immortal words of Status Quo: down, down, prices are going down.
