The Chinese will save iron ore!

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The ABC does iron ore this morning and there are some fun quotes:

Iron ore consultant Philip Kirchlechner said it was being driven by too much supply.

“The problem is there’s been a huge influx of supply into the market over the last twelve months and that’s really the key driver behind this slump in iron ore prices,” he said.

…Macquarie Private Wealth’s Bevan Sturgess-Smith said…”Whenever you get news out of China like that, it does tend to drive markets down a little bit, so people get a little bit nervous,” he said.

An oversupply of housing and government moves to discourage investment in the market have been blamed for the slide.

“The government in China is worried about the property bubble; a lot of people in China invest in property,” Mr Kirchlechner said.

“The Chinese government wants to take the heat out of that bubble, which is a good thing, to put China on a more sustainable growth path.”

But he said the downturn was weighing down iron ore sentiment.

“It will have a psychological impact on iron ore traders who see the property market slumping. They immediately think it’s going to mean less demand and therefore less demand for iron ore,” he said.

“But it’s not necessarily going to be the case that less construction will happen, there is just a temporary deflating of the housing market.”

While Mr Sturgess-Smith believes prices have a little further to fall, he is confident of a turnaround in both housing and iron ore.

“We’re pretty comfortable that those figures will start to move back up towards the end of the year,” he said.

“We do think it’s cyclical but also there will be some intervention from the regulatory authorities as well.”

Despite the predicted up-tick in prices, Mr Kirchlechner said price volatility would continue.

“Two years from now, Brazil will put … a big new mine into production. So in two years, you’ll see again a pretty lumpy increase in output that will cause another slump [in] prices,” he said.

“So, this volatility will continue as supply tries to catch up with demand and then overshoots again, but in the short term I think prices will be pretty stable, around the $90 mark.”

A few points of correction:

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  • Chinese construction will fall with property prices. That’s a certainty, just as it is everywhere else;
  • the Chinese property slowdown is in some large part structure (oversupply) so there will be no lasting rebound and even if they stimulate aggressively now it won’t impact iron ore until Q2 next year and may not work at all (given it’s structural);
  • however, there’s sure to be some offset in infrastructure stimulus;
  • there will probably be an iron ore price rebound by year end, but from what level and how high will it get? Lower and not very far are the probable answers;
  • supply is expanding well before Carajas arrives in 2016 (and it’s more like eighteen months away). In the mean time, Anglo American is adding 20 million tones per annum (mtpa) in December, India’s Goa state will return with roughly the same, BHP is driving madly towards 290mtpa from 230mtpa currently, in Q2 Rio will likely approve a drive to 360mtpa from 290mtpa, Roy Hill will add 55mtpa later next year…

Unless Chinese iron ore production completely collapses, it’s an unfolding disaster next year with prices headed for $70 and blood flooding the gullies of the Pilbara.

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.