Iron ore price bottom is in

In some good news for the Australian economy, it looks like the medium term bottom is in for the iron ore price:

That’s an encouraging table with the entire steel complex on the up. Here are the charts:

My retest of the lows looks to have already happened and moved on. Indeed I think it’s time to turn our attention to where the rally might get to.

The $120 area looks like it will create very serious resistance as it was the area of former downside support for traders. Many of those will be nursing losses from this entry point and will no doubt be keen to lighten up on some of the massive inventories that seem to have been largely untouched as this price correction transpired and cheaper stock was available in the spot market.

So, in a terrible act of irony, the $120 area could now become the new ceiling for the iron ore price. Technical analysis supports this thesis too with the area of support during the old head and shoulders pattern now marking resistance. For 12m swaps that is right on $120:

And for spot it’s $130:

We shall see.

I more bold conclusion is that the pipeline of Chinese stimulus projects is now having some impact on demand and that Q4 Chinese growth will show the bottom of the current slide in GDP. I expect no “v-shaped” recovery.

Comments

  1. I think it’ll turn and head back down. Prices are high considering global economic situation, so its just a temp bounce.

    • Ah, if you say so. I suggest you reread the post. I expect the $120 area to now be the ceiling for prices, thus suggesting the equilibirium price will be lower. What’s more, I expect the rally to fade by mid next year into another new equilibrium well below $100.

    • “Couple that with the rising house prices, solid auction results, low unemployment, record car sales, QE3, and I gotta say, things are looking very positive for Australia.”

      Rising house prices – you mean those ones on a Japanese style melt since mid 2010?

      Low unemployment – did you read the horrible record quarterly result for unemployment yesterday?

      QE3 – useless unless people want to borrow which they either a) don’t or b) can’t. Read ZeroHedge for the diminishing returns on each intervention by the central bank

      Yeah – things are absolutely rosy. Time for a mega mortgage that eats up 50% of take home pay of a dual household income…

      • Forgot auction results – you mean those ones regularly fudged by their dodgy methodology to appear 10% above what they really are when considered in layman terms of a successful auction (read Chris Vedelago’s recent piece on this fudging and get back to us ‘Contrarian’)

  2. Logic would suggest that it won’t go back to $12/T again, but below $100 is likely at some point. Surely miners will be looking at trimming costs, and if necessary states who have increased royalties might need to take a haircut on their take. In the end we are a mining community and we have to make it work for us. To stop mining altogether is not an option for Australia.

      • It well may change – but not to anything near as beneficial!

        And change to what? Sans resources we have no other point of differentiation from any other nation; we now face the challenge of achieving growth in a slow growth world where global competition leaves a comparatively highly remunerated/high cost structure nation like ours on the shelf.

          • Every other developed economy in the world is struggling with similar economic challenges – thus far we have largely been spared the pain via the resources boom.

            Sans resources boom we can expect to join the crowd of nations experiencing low growth, intransigent high unemployment, continued private deleveraging, banks under pressure and various attempts to salvage manufacturing capacity lost to more competitive offshore production.

            And you know it.

          • Yes – the housing bubble – we are no different.

            However, thanks to the flow-through effects of the resources boom so well detailed by DE, we have been ‘protected’ from full post GFC fallout – of which the collapse of property markets is major.

            Our resources boom good fortune = our point of differentiation.

          • No shifting of the goal posts – that has always been my position.

            Back to my response to UE: calls for ‘over-dependence’ on resources to change are all well and good in theory. But in reality ‘change to what’. The past decade has seen growth around the world on the back of the biggest credit bubble in history; a major shift in production capacity to cost competitive emerging nations; in Australia unsustainable growth in welfare/entitlement programmes etc.

            Our resources capacity remains our natural comparative advantage – in near all else we run with the pack, if we’re lucky.

            Change to what?

        • I don’t buy your MCA sponsored “we should be grateful that mining boom helped us kick the can down the road” message.

          If at all, the boom only postponed the eventual reckoning by a few more years, while in the mean time, it weakened our economic strength (“compartive advantage”, if you will) in other productive areas of the economy by a greater degree.

          I don’t see how you can call that a blessing for the nation’s long-term economic well-being!!

          • Mav,

            Honestly, you have no idea what our economy will be like in a few more years. No one does for sure. An opinion or an educated guess, yes.

            But we all know the past.The resources boom saved this country over the past decade. Even though it may have caused stress to other parts of the economy. But no one can doubt that resources saved Australia from the economic fate we see elsewhere. 3d1k is right- absent the resources boom we are a UK in approximation.And what a mess that would be, for everyone.

            It is up to Govts to manage the economic settings and policy with the RBA, to chart the right course. Being bitter at the MCA lets those actually responsible off the hook and free of the much deserved scrutiny for their past errors.

          • “The resources boom saved this country over the past decade.”

            This is what you call an “opinion or an educated guess”. All you can truthfully say is that had the mining capex boom not occurred, things would have been different.

          • Phil,

            Do you argue that the resouces related boom (capex portion or otherwise) did not have a nett positive impact on our economic situation?

            While the capex boom was going on there is maining too. Exports increasing. Profits accrueing. And expanded workforces as a result , cashed up and spending. Contractors growing to fill demand for all kinds of goods and services. Nothing positive there?

            What I can truthfully say is that things would have been materially worse for our economy absent the resources boom. Unless you have identified something to the contrary?

          • “What I can truthfully say is that things would have been materially worse for our economy absent the resources boom.”

            I am simply making the very obvious point that this is your opinion; nothing more and nothing less.

            Would we have been better off or worse off? I’m objective enough to say I don’t know.

            Feel free to opine as you wish. Opining is what MB is for. Just don’t pretend you *know* these things.

          • “Do you argue that the resouces related boom (capex portion or otherwise) did not have a nett positive impact on our economic situation?”

            I do. The so called “economic fate” is what is known as a necessary correction.

            It’s moronic to think that scarring the country to all buggery is “saving” us all from doom when in fact it is blocking us from economic diversity.

            There’s got to be an Aesop fable here somewhere to make the concept more accessible to the pea-brained.

          • Rapper,

            The necessary correction that didn’t and caught you short you mean?

            Take your bitterness out somewhere else. In the meantime, there are hundreds of thousand’s of mortgage holders who still are thanks to the nasty resources boom.

            Diversity to what, scary Javier? Not pipedreams mind.

        • It well may change – but not to anything near as beneficial!

          Oh dear! You have got to have a hand on it.

          Beneficial to whom, exactly? And in what proportions, exactly?

          How exactly is it “beneficial” to the majority of the Australian people and their descendants – those earning under $100K household income – to bias the economy towards digging up the nation’s non-renewable dirt, and selling it abroad (as fast as possible), with the bulk of profits from said enterprise flowing offshore to the majority-foreign-owned miners’ executives, major shareholders, and their financiers?

          Unlike many here at MB, I actually like and agree with quite a few of the points and arguments you raise 3d1k. But really, this comment is just patent bull$h!t.

          Or should that be, patent 3d1k$h!t.

          • Beneficial in myriad ways Op8!

            Foreign capital inflows generated by the resources investment boom have been a positive for national income. Because of the boom we have been one of the few developed economies (thus far) not to succumb to major post GFC economic woes.

            Other developed economies although having expertise in a range of sectors including specialised manufacturing have not fared so well – it has been a low growth global demand world. Post GFC countries fortunate enough to have comparative advantage natural resource base have travelled well largely due to the China growth story.

            The majority of Australians have benefited by the very fact that our economy did not seriously falter like that in the US,Ireland, UK, Spain et al. And what a great beneficial outcome that has been. Our strong AUD has been a prime element in transfer of economic wellbeing to majority of households – a lid on inflationary cost pressures via cheaper cost of imports (almost everything!) and importantly the cost of fuel. And what a great beneficial outcome that has been.

            Not to mention proceeds to government coffers enabling much middle-class welfare, boost to engineering construction sectors, employment opportunities, improved ToT etc.

            Hard to think of anything likely to have had now or in the future the beneficial effects of the resources boom (particularly when most needed).

            DE’s posts are always worth another look, the 3 previous posts he links to below are well worth the time.

            http://www.macrobusiness.com.au/2012/08/the-mining-booms-balance-of-payments-risk/

            Mod: this paid message brought to you by the mining industry….

          • “The majority of Australians have benefited by the very fact that our economy did not seriously falter…”

            I don’t dispute the impact of the mining boom in staving off hard times. However, it is my view that this only gave the clowns presently in government the excuse to go on an unprecedented and continuing spendathon, dramatically weakening our situation for the (near) future, when they could/should have been addressing some of the myriad failures of the previous government. I don’t buy the argument that we should be grateful for an exercise in can-kicking – justified by K. Henry’s “40 years” of “unprecedented prosperity into 2050” – that makes us even more vulnerable to the next wave/s rolling in.

            “Our strong AUD has been a prime element in transfer of economic wellbeing to majority of households – a lid on inflationary cost pressures via cheaper cost of imports..”

            Further weakening our national capacity for self-sufficiency, whilst encouraging the continuation of a debt-fuelled, materialistic, consumerist society, rather than a prudent nation of savers and producers.

            “Not to mention proceeds to government coffers enabling much middle-class welfare…”

            Added onto an already unsustainable structural budget deficit (thanks Little Johnny), & further cementing an ever-growing societal attitude of selfishness and “entitlement”. Not a positive in The Big Picture, long term view.

            “…boost to engineering construction sectors, employment opportunities…”

            Where? In mining, perchance? Again, this is a short term benefit only. And last I checked, engineering construction (esp. viz mining) does not exactly qualify as a significant % of total Oz employment.

            “improved ToT…”

            As you know, many on MB and elsewhere have argued far more eloquently, knowledgeably, and persuasively than I ever could that there have been significant downsides to the ToT “boost” as well.

            I understand your position 3d1k. My problem with it, is that it is based in short termism.

          • Mining has been around for a long time…no short termism there.

            In a general sense I agree with your misgivings as to the way the boom has been handled by government, particularly handouts and continuation of sense of welfare entitlement – but that is a managerial and leadership issue – and that is the area the concept of ‘short termism’ is most applicable: squarely at the feet of our political masters.

            As for the philosophical bent I am sympathetic. Alas we are imperfect creatures in an imperfect world – the human condition. Would not be surprised that even if everything was ‘perfect’ we would be hopeless drawn into stuffing it up – it is in our nature, never satisfied.

          • “I agree with your misgivings as to the way the boom has been handled by government, particularly handouts and continuation of sense of welfare entitlement”

            But … you just referenced these very things as examples of your position that the mining boom has been beneficial, and any change to the status quo viz our dependence on mining in future would be far less beneficial.

            Now you are saying that you (too) have misgivings as to the very benefits you previously alleged.

            Please do not try to wriggle out of this with the red herring about government mishandling. Either these results of the mining boom are beneficial, as you first claimed. Or, there is a question mark over the benefit/s, as you have subsequently agreed.

          • The mining boom has been beneficial. You asked how the boom has benefited majority of Australians on under $100K – and I provided just some of the many direct benefits to those Australians.

            The promotion and expansion of handouts/middle class welfare is not something I particularly endorse – however the recipients of said largesse no doubt view money for nothing as a ‘benefit’ 🙂 and of course this is where the question of managerial stewardship of the proceeds of the boom deserve to be questioned.

            I think we can agree that overall the boom has been enormously beneficial.

          • “You asked how the boom has benefited majority of Australians on under $100K – and I provided just some of the many direct benefits to those Australians.”

            Which I critiqued as being short term “benefits”, that also represent a heightening of risk for the future. To which you agreed.

  3. Wow. Talk about self-esteem issues! If we didn’t happen to own dirt of a slightly above average utility we’d have been stuffed! And once we can’t sell the dirt for a high price any more, we’ll be stuffed! Call me a misty-eyed idealist, but I’d hope we could set our sights a bit higher than that. There are plenty of small countries that, you know, MAKE things to sell and seem to do quite well at it. I’m thinking of Sweden, Switzerland, Finland for example. Hell, even Ireland has a strong pharmaceuticals manufacturing industry, international financial services industry and software export industry, believe it or not. (These were deliberately created by government policy and they are what will pull Ireland out of its present mess. They have a core of marketable, useful SKILLS in that country.) Not saying these countries are perfect in every way (Ireland obviously) but to say that Australia is doomed to be a continent-sized trust fund baby because we’re just not capable of doing anything else is, I think, wrong.

    • Perhaps at some point in the future we will carve a niche for ourselves focussed on something the world wants to buy, apart from our natural resources.

      And a good place to start encouraging business might be by adopting Ireland’s corporate tax rate.

      • What are we waiting for 3d1k? This is my issue with the mining boom. It allows us to remain perpetually adolescent. Until it doesn’t…

        • Waiting for a 12.5% corporate tax rate…seriously though McPaddy, economies that you might refer to as mature and diversified are struggling and will continue to struggle until global growth resumes.

          When global growth resumes our resource base will again be in favour. What direction do you think we should take to secure a global customer base not primarily attracted to our natural resources – given similar is also the aim/direction of every other developed economy simultaneously.

          Structural shift in global manufacture has changed the game.

          • Obviously this isn’t a simple question, but I think that the starting point has to be – what are our sustainable advantages in the context of our position next to Asia and all the consumers it holds? Off the top of my head, I’d say they are: space, natural and relatively disease-free environment, rule of law. Frankly, that’s not an inspiring list and perhaps I’m missing quite a lot.

            I only have really experienced the Irish example, but they were very aggressive in using tax policy (0% corporate tax rates in some cases) to attract FDI in knowledge-based export industries. These businesses employed locals, who thereby gained useful skills and paid income taxes – meaning that the tax breaks given to the foreign corporations were not a drain on the local economy: quite the reverse. Over time, this translates into a critical mass of home grown experts in a sustainable business. Are we too proud to try something of this nature? It works.

          • I absolutely think we should give it a try – I have also found some of Peter Thiel’s ideas on similar very stimulating. Provocative, but stimulating.

            Continuing on the same path with no genuine reform and expecting miracles of resurgence in a radically globalised world will be at our peril.

            …and we all know what comes after the pride…

      • If we put half the effort into punching above our weight in innovation and industry as we do in sport, we’d be home and hosed. The targetted and deliberate investment in sport I think proves what we as a nation can accomplish when we can be bothered. It’s the “when we can be bothered” part that’s the problem.

        • I agree. We need promote innovation, R&D, the hard sciences, technology, medical research etc – assisted by very generous tax treatments, moderation in bureaucratic red tape etc. Have aired my views here at MB previously.

          The mining boom buys us time to address these challenges in a mature way – I do fear our complacency and detest the tall poppy syndrome.

        • +1 Mc Paddy.

          But we are far too complacent, agree with 3d1k there.

          Somehow I think that will change over the coming decade, by necessity. But it will take pain and Govt’s bringing the people along with the structural changes we need in place to compete in the “diversified” spaces we aspire to compete in.

          Tell me, who is up for that?

      • dumb_non_economist

        Yeah, I agree 2d. An Ireland size corporate tax rate for non-resource companies and a real resource tax to help fund it!