Terms of trade holding up

There are signs that the iron ore price correction is easing. The price has risen a couple of bucks (blue line) over the past few days since the mooting of a Chinese stimulus, whatever it will be. Also encouraging is that the Chinese steel prices for billet (pink) and rebar (green) have bounced at the same time. Coking coal remains solid at just under $120.

On the red side of the ledger, however, 12 month swaps for iron ore (yellow) are falling again and thermal coal (red) has hit a new correction low at $90.

It seems unlikely this easing will last, although any announced Chinese stimulus will clearly support prices. When, however, the CEO of the most sensitive iron ore stock in the world says that:

The reported stockpiling came as the chief executive of Fortescue Metals, Neville Power, warned yesterday that iron ore prices would fall 19 per cent before finding a ”long-term sustainable” level in China. “Looking forward, we’ve allowed the forecast to drop down to around $110 a tonne and done all our modelling around that,” he told ABC TV. “Long term, that will be the sustainable price.”

You should probably brace yourself. I thought the long term floor was supposed to be $120.

The balance of the price shifts with the Australian dollar is beyond my paltry brain to calculate but late on Friday the RBA released its May Index of Commodity Prices, which had good news:

Preliminary estimates for May indicate that the index fell by 1.9 per cent (on a monthly average basis) in SDR terms, after falling by 2.6 per cent in April (revised). The largest contributors to the fall in May were decreases in the prices of oil, gold and iron ore, while the prices of base metals and a range of rural commodities also decreased. In Australian dollar terms, the index rose by 0.9 per cent in May.

Over the past year, the index has fallen by 9.9 per cent in SDR terms. Much of this fall has been due to falls in the prices of coking coal and iron ore. The index has fallen by 7.6 per cent in Australian dollar terms over the past year.

As indicated in previous releases, preliminary estimates for iron ore, coking coal and thermal coal export prices are being used for recent months, based on market information.

For further details regarding the construction of the index, please refer to ‘Updating the RBA’s Index of Commodity Prices’ in the October 2009 issue of the Bulletin.

So, the falls in the Australian dollar clearly outpaced the falls in commodity prices in May, which is terrific news. Let’s hope it continues.