Is the iron ore price fall structural?

As I wrote yesterday morning, I’m on board with the iron ore bounce theory. There is enough Chinese stimulus in the pipeline to get things moving for a while later in the year (I think!). Though I’m seriously starting to wonder from what price the bounce will come. Overnight action was not too bad for ore but Chinese steel tanked again:

It now looks like this:

Little wonder then that we’re seeing the following, via the AFR and from an executive in a top five steel mill:

BHP right now is offering cargoes on the spot market but no one will meet their price expectations so mills are going about $US5 below what BHP can offer…Rio Tinto right now don’t have long-term contracts for buying 30 per cent of their shipments on a regular basis. They are offering cargoes at spot prices to traders just to move the iron ore. Sinosteel is stopping steel mills from bidding, they prefer to buy it from the stockpiles in China. I think some big traders can still get money from the banks, but if traders stop buying, then there will be a big problem.

Yesterday the AFR provided a chart via Deutsche Bank to prove the point that an ore price bounce is coming:

The nice blue line is promising and I agree that it will support an ore price bounce. But in the longer term, it’s the grey flat line that matters, as the following recentish chart from the ANZ shows nicely:

In short, over the longer term, nothing short of full blown, turbo-charged urbanisation is going to keep demand for ore at levels previously thought of as invincible. I’m not sure how anyone ever thought this was possible.

And it looks increasingly like nobody else believes it either. The Australian reports on turning sentiment in the broking community:

Amid growing talk of iron ore shipment deferrals and reports BHP Billiton would further cut expansion plans if prices stayed at current levels, analysts remain sceptical of BHP and Rio Tinto forecasts that China’s crude steel output will grow to about one billion tonnes a year (from about 700 million tonnes now).

“We’ve done lots of work on steel production and demand growth in China using different angles . . . and we could only get numbers of 800-850 million tonnes (a year of steel production), maximum” between 2014 and 2016, UBS analyst Tom Price said.

“I couldn’t see how they (BHP and Rio) could get to one and 1.1 (billion tonnes), they were huge numbers.”

The tide is going out on iron ore and, barring an increasingly remote re-inflation of China’s property boom, it’s structural.

David Llewellyn-Smith
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    • Japans fixed investment was at 33 percent before it popped and China is at 50%. Soft landing……… LOL

      From John Lee article”Since the mid-1990s, urbanisation has been advancing at the rate of less than 1.5 per cent each year. Yet fixed investment has been growing at 20 to 40 per cent each year for the past decade. Fixed investment as a proportion of GDP increased from 38 per cent in 1999 to 45 per cent in 2003 and over 50 per cent currently. During the periods of rapid industrialisation in Japan, Taiwan and South Korea, fixed investment did not rise above 33 per cent of GDP. That China is dangerously embarking on a unique and unprecedented economic path is further confirmed by the fact that formal bank loans increased from $750 billion in 2008 to $1.4 trillion in 2009. In the two years from 2008-2010, the amount of outstanding loans on the books of the country’s banks increased by 58 per cent”

  1. Overcapacity in China which got to a structural problem IMO. IO will come back, but not at the levels we’ve seen. There is going to be a new normal, and the RBA/Treasury will find that out eventually.

    The issue to see now is how that hits mines both here and around the globe as the marginal mines will close.

    I still think the Chinese will stimulate in 2013, but that’s not going to be a long term fix.

    • I think China will hold off on the stimulus until they can buy some distressed Aussie miners at rock bottom prices with their increasingly worthless USD reserves – two birds with one stone.

      Meanwhile, social unrest due to increasing unemployment will be controlled/contained by other means.

      • Mav, likewise I think that it’s a possibility. I’ve been saying why would they not allow this unwind to happen. it’s way better for them in the long run.

        the social unrest thing is the big issue for the central government.

      • social unrest due to increasing unemployment will [attempt to] be controlled/contained by other means.

        However the success of these ‘other means’ is by no means certain.

  2. What I find amazing with all these Chinese RE projections is the absence of bottom-up rent based analysis regarding the affordability of Chinese apartments.

    If you think Sydney has a rental affordability problem you ought to take a close look at Shanghai! Just to give you some idea a PhD engineer in Shnaghai might get paid about 20K-RMB / month yet a low end 100msq apartment costs in excess of 6M RBM.
    BTW a secretary earns about 3500RMB/ month, do the affordability analysis of how much apartment area they can afford to rent and plug that back into the current apartment build cost model….ooops. You will quickly see just how unsustainable the current Iron-ore prices are.

    The only way around this is for massive wage inflation, which China has already decided is contrary to its best interests

    Bottom line: Iron ore prices must fall

  3. I’m eagerly awaiting Phat Dragon this week, particularly his sophisticated and not-at-all linguistically challenged take how the filling investment pipeline will save us all.

  4. Is the price fall structural?

    Well the post-GFC rise wasn’t structural, it was stimulus driven – a rocket from $60/tonne to almost $200/tonne.