Iron ore still falling

Yesterday brought no respite for iron ore. The 12 months swaps market fell another 3.08% to a new low at $117 and Shanghai rebar was down 2.44%. Ore itself fell 1.3% to $145.80.

If you combine this with the dizzying crash of copper, 6% last night to a new correction low, you have to ask what these markets are signaling about the China slowdown.

In less unsettling news, FT Alphaville picked up yesterday’s discussion at MB on the implications of this volatility for the Australian economy.

Houses and Holes

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.

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  1. The miracle has ended, at least for the time being. The ore market has a a history of bouncing straight back up again after these dramatic falls, so anything is possible.

    Fanboy, when do you get worried? $120? $100? $80?

    • 1. Iron ore prices were much lower than now last year. In your words the miracle ended at least for the time being mid last year as well.

      2. As you point out it has a history of bouncing back pretty rapidly so it would be a brave to call this a permanent correction but clearly steel makers need to see things more rosy before we see a recovery in the price.

      3. Iron ore is still profitable at $120, $100, $80. Reasonable valuations over the next 3-4 years would/should have priced iron ore probably about where it is now rather than the peak prices. Having said that I have noticed that prior to the GFC when prices were high, bank analysts tended to under estimate future prices whereas now they are tending to expect prolonged upper range prices. In other words in the past they were too conservative now they are probably too optimistic. I still like iron ore stocks after they fall further with this correction.

      • Iron ore prices were much lower than now last year

        Yeah, but only very briefly around July.

        This downturn looks more serious than the 2010 “soft patch”. In mid-2010 the ERCI was calling “no recession”, this time they’ve called a recession. In mid-2010 Europe looked like it could still muddle through, and China was still on the upswing.

        Of course iron ore producers will still be profitable at $80 or less, but you can make a lot less profit at $80 than $180, and surely some of that froth was built into the miners share prices?

      • I have noticed that prior to the GFC when prices were high, bank analysts tended to under estimate future prices whereas now they are tending to expect prolonged upper range prices. In other words in the past they were too conservative now they are probably too optimistic.

        It’s simple inertia – people see a trend line and they keep expecting to see it. That’s why I slightly mistrust technical analysis when it is done without context or taking mob behaviour into account.

      • MontagueCapulet

        I like iron ore stocks in 2015 when they have a 10% dividend yield because everyone is convinced China is going to stagnate for 20 years like Japan.
        Iron ore will still be profitable at$80 but you can bet the share price is going to get slaughtered between now and then. I agree that the recent moves may just be jitters, but when the China construction bubble does actually end and we move into oversupply, the decreases in valuations of Atlas, Fortescue etc will be truly savage. Don’t want to catch that falling knife.

    • I’m worried now. This is the calm before the storm. Europe is stuffed. The ECB is losing control of bond yields again. America has run out of stimulus and the ECRI will be proved correct. Japan is moribund. In England they survive only by monetising a large slab of the debt. China is looking shakier each day. The clouds are converging and a hard rain is going to fall. And then everyone will realise the mistakes of the previous three decades. The ponzinomics illusion will be punctured. And when that happens, after the dust settles, it will be a terrific buying opportunity. But we’re not there yet.

    • darklydrawlMEMBER

      For mining in the Pilbara at least the approximate mining cost is $US40 per tonne for Iron Ore.

      So right now it is mostly cream on top. However a drop to below $US40 p/t would make clearly make it uneconomical to continue.

      Prices have been as low as $US20 per tonne in the past.

      • MontagueCapulet

        If iron prices fall dramatically then the Australian dollar is likely to fall as well, thanks to the end of !FutureBoom.
        Worst case, if prices fell to US$50 p/t, we’d probably see the Aussie back to 50 cents as commodity currencies got sold off, so we’d still get A$100 p/t tonne for the ore, so still quite profitable.
        The real issue is that the Aussie is likely to nose dive in response to the “end of the resource boom”, especially if the housing bubbles in China and Australia pop at the same time.

        My guess at timing is that we see US$90 iron ore by 2014 and the Aussie back in the 50-60 cent range, with the brief dip into this range in 2009 being a foreshadowing of what happens to the currency when the market decides the boom is over.
        But I wouldn’t get to excited by the latest drop just yet, could just be market nerves.
        It does show how quickly prices will change when the Chinese construction bubble does eventually pop.

        • darklydrawlMEMBER

          Good point, The FX rate will certainly come into play when determinint the economic cut off for mining.

  2. The story in the daily links about steel markers in China doing it tough suggests iron ore has quite a bit further to fall.

  3. I also recall reading something recently about an enormous stockpile of iron ore that had been purposely built up so that they would have some leverage in the future against price rises. Does anyone else know anything about this? If true then it does follow an Asian trading pattern – I recall the Japanese doing this to various commodities in the late 80’s and early 90’s.