Iron ore and the Australian economy

ANZ has a solid note out on the impacts of the falling iron ore price on the Australian economy. You can nit-pick bits and the various macro components may not play out as suggested but in aggregate it’s good and worth a read.

Iron Ore Update August 2012

Comments

  1. They seem to pin a lot on the forthcoming (and in progress) LNG projects…

    “Boosting the economics of the US export trade, transportation costs for US gas will fall in 2014 when an expansion of the Panama Canal allows LNG tankers to pass through. Australia’s pipeline of projects already in construction is underpinned by long-term contracts that link to international oil prices, which means US shale gas exports should not affect them if the contracts hold up.”
    http://www.theaustralian.com.au/business/mining-energy/shale-rise-threatens-lng-exports/story-e6frg9df-1226306628133

    Given the example of recent Chinese defaults on Iron Ore contracts it seems Australian LNG projects & contracts could also be under threat (?):

    http://www.forbes.com/sites/gordonchang/2012/06/03/chinese-purchasers-default-on-commodity-contracts/

    • LNG is better placed for now but there is no doubt that it faces similar dynamics of aggressive demand growth assumptions in tension with a dramatic investment ramp. I think the current projects will proceed but the next round is surely off and the assumptions of a boom in exports following completion (mining boom phase III)are very bloated, given the North Asia gas price will dive.

    • I wouldn’t hang my hat on the freight savings. Panama Canal operators know the costs of going the long way vs thru the canal and set their fees accordingly. End result is that most of the savings go to Panama Canal…

  2. Although serious default level occurred post GFC, defaults in more recent times have been largely confined to those Phat Dragon refers to a ‘rogue commodity traders’ and not significant.

    Bulk of Oz LNG has been long-contracted to Japan, SKorea, Taiwan.

    There is much debate as to the economic future of shale particularly in the US, see here:

    http://theautomaticearth.com/Finance/shale-gas-reality-begins-to-dawn.html

    US energy forecasts:
    http://www.eia.gov/forecasts/aeo/er/index.cfm

    “..NG is currently trading at about $2.70 per million Btu. But for the long-dated contracts a few years out, NG is trading from $4.00 to almost $6.00 per million Btu”

    http://www.wired.com/business/2012/08/mf_naturalgas/all/

      • C’mon mate, I posted in a generalised way referring to US in reply to BB before seeing your response which chose to focus on Asia..

        • So I’m the one being selective! Except it’s the Asian price that matters to us and the upwards curve you quoted from the US misleads. But you didn’t mean that!

          Bonus at risk!

          • Yes, but he’s referring to the article written by ANZ about Australian LNG…but this is getting trivial.

            If it were up to me, the award would go to you with daylight second.

          • ” negative stigma ”

            as opposed to a positive stigma?

            stig·ma/ˈstigmə/Noun:

            1.A mark of disgrace associated with a particular circumstance, quality, or person: “the stigma of mental disorder”.

  3. very good piece there, what forecasts/price did the treasury use for iron ore in its budget projection?

  4. From the ANZ note:

    “It’s worth noting, though, that despite the recent falls, iron ore prices remain relatively high compared to eight to 10 years ago, when ore was worth around USD30/tonne.”

    I must say that i’m sick of reading that sort of thing – absolute figure comparisons between different time periods, without factoring what price would NOW be equivalent given even basic and very important considerations, such as:

    – the time value of money (general notion of inflation)
    – the specific levels of inflation (increases in the cost of operation) for those iron ore miners
    – etc

    Truly, is there any other sector in THE WORLD that has experienced a greater relative increase in the unit cost of operation than Mining in the last 10 years, and, particularly, the iron ore sub-sector?!

    Consequently, citing that “iron ore prices remain relatively high compared to eight to 10 years ago, when ore was worth around USD30/tonne” really does not provide much necessary comfort, without further qualification, context; better than the omitted assumptions, yes?

    The truth is (and others could say better than me), the equivalent price for today could be $60-80/T, could it not?

    Sorry for the rant, but it touched a nerve: poorly communicated, if not shoddy, logic.

    My 2c
    /rant off

    • Totally correct, TBW, it’s not as if labour, energy and materials costs are the same as 10 years ago, let alone ore grades or strip ratios or dewatering requirements or …