Where does all of that iron ore go?

ANZ has produced a useful note on the outlook for iron ore. Regular readers will recognise plenty of conventional wisdom at work here, with the basic argument being that ongoing modest growth in Chinese demand and the cost curve for supply will support prices in the $120 to $160 range.

That’s fair enough if more bullish than I’d be, but what caught my eye was the above chart on the sectoral breakup of iron usage in China – including 39% of consumption being real estate – as well as some interesting anecdotes on iron ore hoarding.

Neither of these made me terribly comfortable but see for yourself.

China Iron Ore May12 (2)

David Llewellyn-Smith
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  1. 39% that is huge. The supposed central and western developments are either stalled or going at a slow pace, so I can’t see how the high IO prices will hold up. Vale a few weeks ago were talking USD 180. Maybe they know something we don’t. Again I keep hearing that for at least a year development in China will be minimal due to the change in central government, so without any other knowledge I’d be saying don’t bet on prices staying at these levels. They might pickup in the future???

  2. Interesting read, 39% for housing does raise the eyebrows.

    On the surface a tad bullish but the steel growth projection is still in line with forecasts from people/groups that were tagged as bearish. So whats bullish and bearish these days seems to be how people want to present themselves — the forecasts aren’t coming out too different despite different punditry labelling.

  3. The 6% going to car manufacturing makes a mockery of those analysts who suggest that iron ore demand will continue to grow after a real estate bust in China.

    We are highly leveraged to one sector of one economy, a sector that many have suggested is the biggest bubble in history. So, nothing to worry about there. Its not like we need a Plan B or anything…

    • interested partyMEMBER

      Yep, got to agree Lorax.

      As for plan B……close the borders and grow vegies…..go fishin.

      • I think it better to say we are ‘reliant on’ rather than ‘leveraged to’. There is no Plan B because there can be no Plan B. Someone tell me a Plan B! Without the boom we’d already be toast.

        It ain’t over until it’s over. China or bust.

          • Peter Fraser

            That would be desireable, but I don’t see how it would be possible if China suddenly reduced their ore intake. That would cause us massive problems, and it will take years to regenerate the industries that we have all but lost, including tourism and education.

            The trouble is that I’m not 100% convinced that the pain would be much less if that happened gradually. A long period of “nothing” between phases would be devestating.

            Remind ne – what was plan “C”

          • Increasing other exports – well we’ll see if DFMs AUD.90 heads us in that direction won’t we.

          • Oh that’s a relief. We’re not leveraged to a giant construction bubble, we’re just reliant on it. I can sleep now.

            And of course, we can’t do anything about it anyway, we can and must hurtle towards the cliff, because there are no alternatives. That’s reminiscent of your climate change arguments MineBot.

          • Don’t know if I’ve every really argued the climate case. I’m an adaptive agnostic.

  4. Quite amazing: not only is our economy dependent on a domestic real estate bubble, we’ve also managed to hitch our wagon to an overseas property bubble at the same time!

    Thats quite an accomplishment i must say.

  5. First, let’s seperate prices from construction first – when it comes to property, people get the two confused.

    Chinese property prices are crazy – yes absolutely.

    Chinese construction is overdone – actually not.

    Most Chinese still live in crappy places with no insulation, a shared kitchen or bathroom (or both – yes imagine sharing your bathroom with 5 neighbours) and have maybe 20sqm per person if they are lucky. A back yard is only for the incredibly wealthy (and I’m talking 3 million AUD plus) or the rural countryside. China basically started only buidling proper housing in the last 15 years…for a mere 1.3 billion people. Its got quite some catching up to do.

    Also most constrution in China actually first demolishes existing property in most cities – not much greenfield development here.

    You might not have noticed if you aren’t living in China (like I am) that the government has actually been trying to control property prices for a good 18months-2 years now and is somewhat succeeding with prices now down 10-15% at least. No sign of a collapse in iron ore prices though was there?

    The construction industry is going through a restructuring as poorly funded smaller developers are pushed out by the bigger better funded (and often state-owned guys).

    Now I’m not going to argue that much construction isn’t wasted investment – a large portion is wasted. But it is all funded by a government that lends to itself with its own assets as collateral (since the government owns all the land). Given it can write off the debts to itself, a banking bust is a theoretical proposition, not a practical one.

    Prices boomed and went downright Home Simpson insane in China with prices in Shanghai equivalent or more expensive to New York on perhaps 1/40th of the income. That’s nuts. Bonkers.

    But there wasn’t a contruction boom of residential property of equivalent size (although harder to argue that for railway lines and commercial buildings in many cities).

    My friends in the steel industry in China are still comfortable that expansion will continue. Trust me, they watch all these stats like a hawk.

    That said, when iron ore capacity expands in Australia, Mongolia and elsewhere, prices will have to drop from their recent highs.

    I’d find it more interesting to look at future increases in iron ore supply rather than worrying about a collapse in Chinese construction.

    • Thanks, interesting post.

      Chinese construction is overdone – actually not.

      You don’t think its “overdone” when China has the highest investment share of GDP of any country ever?

    • ocaterer, please keep posting as this is interesting. I was in central China last year and it struck me what you’ve said here. I saw the same thing wrt to residential, and we looked at a few commercial buildings that were new, but the companies that were to occupy them ran into trouble, and it scared me as you never know where you stand there even if you have good contacts. I saw lots of idle cranes and lots of unfinished building projects. My take away was that things can change under you and we saw that and ran away as you’d get a different story at each meeting.

    • Comment much more akin to those I hear from our locals. There is also the continued (in fact to be expanded) government push into affordable housing – housing for just the types of situations you mention. Thanks for sharing.

      In addition, from a recent link, something to consider:

      “Thus, an economy may be highly fragile even if there is no bubble, and a bubble may exist, but financial fragility may be limited because of the limited recourse to external funding. In that case, a debt deflation is not possible given that debt is not involved, or is of limited size. An example of this would be the current housing bubble in China, which is mostly self-funded.”


    • With such GDP per capita is it any wonder that most live this way? Surely affordability must come into supplly at some level, I mean Ferrari could send 10m cars down to oz, the demand is here as they’re nice cars and we all want one, but price wise the majority will stay on the car yard floor