Daily iron ore price update (Garnaut’s blast furnace)

Here is today’s iron ore complex table, which is the reverse of yesterday:

However, the big news today is all about the news (as it were). Australia’s economic godfather, Ross Garnaut, spent most of yesterday throwing his wayward children into a blast furnace for daring to dream of an endless commodities boom.

“In China thermal [coal] is in deep shit,” said the gentlemanly professor.

According to Peter Martin of The Age, he went on:

”It happens that the Chinese structural change has had its most severe effect precisely on the three commodities which have been at the centre of the Australian resources boom – iron ore, metallurgical coal and thermal coal,” he told a Melbourne Institute conference. ”The awful reality is that parts of corporate Australia have dissipated shareholders’s funds by underestimating the seriousness of Chinese commitments to reduce the emissions intensity of economic growth.”

Professor Garnaut said China had exceeded its ambitious emissions targets, cutting coal-fired generation by more than 7 per cent in the past year. A rapid expansion in hydroelectricity, and wind, biomass, solar and nuclear power, had pushed down coal’s share of energy production from 85 to 73 per cent.

Australia’s iron ore exporters would soon have to compete with massive new Chinese-funded mines in West Africa created in part by Australia’s decision to block Chinese investment at home.

The professor also said that the commodity forecasts of the Asian White Paper were barely believable, that gas and uranium would be far more important to Australia’s prosperity and the challenge was to ”come down from our hump in incomes and expenditure without precipitating recession”.

Nothing here for regular readers to raise an eyebrow at but a nasty burn for the Chinese permabulls that seem to hog the limelight.

And there is more sobering news from China:

Data collected over the first nine months of this year indicates that 48.1% of the iron ore stored at China’s largest port for imports of the mineral are unqualified or substandard, the Chinese-language Economic Observer reports.

China imported nearly 700 million tonnes of iron ore in 2011, a 10.9% year-on-year growth, raising the country’s reliance on imported iron ore to 60%.

Huangdao, in Qingdao, Shandong province, is China’s largest iron ore import port, accounting for one-seventh of national iron ore imports, was found on inspection to contain nearly 50% unqualified iron ore. The two major parameters on which the imports fell short were average quality and short weight.

The inflow of large amounts of unqualified iron ore into the country not only affects the interests of steel foundries, but also the quality of the steel products they make, posing safety risks for downstream producers of construction materials.

In the past, domestic steel factories would buy iron ore from several large companies with a good reputation. However, with raw material prices soaring and due to the financial crisis in recent years, some domestic steel factories have incurred heavy losses. To reduce costs and maintain revenue, domestic factories have resorted to importing large amounts of low-priced iron ore from medium and small iron miners in countries such as India, Iran, Ukraine and North Korea, the report said.

With abundant low-quality and low-priced iron ore available in emerging markets, their prices were lower than high-quality iron ore, even after adding refining costs.

However, problems encountered include chaotic management and the low reliability of small and medium iron ore companies. The incidence of iron ore imports being below par and of short weight have gone up over the last two years, the report said.

Following rampant exploitation over the past several decades, iron ore mines in Brazil and Australia have become depleted and the quality of minerals from large mines has declined.

An inspection official said that since some foreign suppliers were likely to take advantage of communications problems occurring at ports to carry out fraud, the government should set up a supervision network linking various ports around the country. This would prevent substandard iron ore from entering the country and ensure the country’s economic security.

Now, this might be good news. Australia has cleaner ore than most. But it might not. I have argued many times that the so-called “cost curve price floor” argument, which posits that high cost Chinese ore mines will shut and be replaced by our cheaper ore, keeping the price around $120 per tonne, is weak in part because it assumes the Chinese won’t protect local producers. The kind of regulation of the ports that the article discusses can be interpreted as a forerunner of backdoor protectionism. Customs restrictions surrounding the quality of any given product are page one in the handbook of secret tariffs. We use it great effect ourselves in agriculture. So, this could be the beginning of just such a regime, in which authorities have the bureaucratic cover to eject selected seaborne iron ore from their markets.

You will notice too that the article is explicit about this being an issue of economic security and carries an open warning to Australian majors.

Despite yesterday’s price rises, iron ore has had better days.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Can anyone point me to where “Australia’s economic godfather” went on public record in the past couple of years to slam this government’s budget projections?

    Anyone? Anyone? Bueller?

    20/20 hindsight is apparently an innate talent of economists.

      • +100, would have been +1000000 if you published it in 2006 when the hubris was so high cabbies were advising bankers on stock tips…

          • thomickersMEMBER

            fun fact: a lot of NSW cab drivers in the 80s participated in the private equity group now publicly listed as “Cabcharges” on the ASX

            if you were an owner in the shares until the initial float, you would have made 20-50 times your money invested depending if you chose a dividend reinvestment plan or not.

      • Yes, but predicting “tough times ahead” is not at all the same thing as going on public record to slam this government’s budget predictions.

        He could learn a thing or three from your good self 😉

    • as far as mainstreamers go. garnaut is pretty damn good. his ETS was sound until perverted. his PRRT was world leading and initial MRRT based on this. i will give this guy a nanosecond or two of my time for sure …………

      • Could this possibly have something to do with his not being an ivory tower academic? Years of experience in the business world, dealing with the day to day nitty gritty of gold mining, would tend to keep you in touch with reality.

        • i think no question. but just a sharp mind in general. some glaring hypocrisy though ie, the lihir waste issue v his ETS and climate change etc.

  2. Where did the “deep shit” quote come from?

    This was interesting:

    China had exceeded its ambitious emissions targets, cutting coal-fired generation by more than 7 per cent in the past year. A rapid expansion in hydroelectricity, and wind, biomass, solar and nuclear power, had pushed down coal’s share of energy production from 85 to 73 per cent.

    This, combined with the natural gas boom in the US — which has freed up US thermal coal for export — isn’t good news for thermal coal prices.

    Poor Nathan.

    • It’s all over the press.

      The important lesson from thermal coal is that easy assumptions of endless demand are full of it.

      Iron ore and coking coal are also headed into the brown stuff.

      • Not only dumb, but disgraceful. These are exactly the type of businesses we should be nurturing and promoting – as opposed to witnessing our money pi***d up against the wall in ridiculous whims of incompetence.

        There are all kinds of waste. Wasted OPPORTUNITY is right up there with the biggest waste.

        Makes me despair.

        • From the story in the SMH:

          One of its Blue-gen fuel cell retails for about $30,000 in Australia but as little as €10,000 in Europe, Mr Dow said. The company sold 40 of its units locally last year but the number may fall to as few as 10 this year.

          So why is something made in Australia much more expensive to buy here than in Europe?

          Generous feed-in tariffs mean an operator of the unit can generate about €2600 a year in Germany, more than twice the $1500 average return an Australian operator can expect, he said

          Er, those would be the kind of feed-in tariffs championed by the Greens, and detested by the right.

          • I posted about this article in the morning links.

            These are the real GREEN JOBS we are pissing away because of .. to quote the CEO..

            Without bipartisan support for a sweeping overhaul of the industry, it was unlikely the federal government’s energy white paper, to be released next week, would make much difference, he said.
            “In a market that’s got powerful incumbents, a highly politicised area, it doesn’t make it easy,” Mr Dow said.
            “We’re focusing on those markets that give us the absolute (no) certainty.

            I note that the CEO did not complain about FWA/IR or “productivity”.

      • I bought into thier ipo 7 years ago and i am still waiting. its a good product, just needs support.

    • Few emigrants from China cite politics, but it underlies many of their concerns. They talk about a development-at-all-costs strategy that has ruined the environment…

      Don’t these Chinese emigrants understand they must develop at all costs to make Aussie miners rich?

    • Good one, Mav. So much for the Asian century. I always said I would believe it was the Asian century when people were flocking to Asia’s shores like they have in their millions to the US. The future still seems to belong to the developed world.

  3. ‘Following rampant exploitation over the past several decades, iron ore mines in Brazil and Australia have become depleted and the quality of minerals from large mines has declined.’

    Can someone confirm whether this statement from the sobering news from China segment of the article is correct for Australia?
    Have Australian iron ore mines become depleted with a decline in quality?

    3d1k?

    • If the ammount of money and resources Aussie IO miners spend on maintaining strict compliance with rigorous product quality requirements is any guide,I would say that statement is inaccurate- for Australian mines.

      Product analysis at the buyers end also carries with it penalties for non compliant product. There is plenty of incentive to not provide sub-standard ore.

      The bulk of the new mines approaching completion are very high grade ore bodies.

      I tend to agree with HnH’s assessment. The stage seems to be getting set for some protectionism to take place. I wonder if BHP’s sudden announcement earlier this week reflects somewhat their view of this issue as well.

  4. “I have argued many times that the so-called “cost curve price floor” argument, which posits that high cost Chinese ore mines will shut and be replaced by our cheaper ore, keeping the price around $120 per tonne, is weak in part because it assumes the Chinese won’t protect local producers.”

    I agree and think that analysis is often framed through our western capitalist market understanding, which is then extrapolated onto communist China (or is it “command capaitalism”?)

    China will likely protect it’s industries before it will let market forces prevail.

    • “I start this analysis with China being a kleptocracy – a country ruled by thieves. That is a bold assertion – but I am going to have to assert it. People I know deep in the weeds (that is people who have to deal with the PRC and the children of the PRC elite) accept it.”

      http://brontecapital.blogspot.com.au/2012/06/macroeconomics-of-chinese-kleptocracy.html

      China is a country controlled by robber barons. Those with means of course know this and respond by leaving or setting their futures up outside China. Communism is just a convenient already in place vehicle (thank you Chairman Mao!) through which to control the flows of wealth.

  5. “I have argued many times that the so-called “cost curve price floor” argument, which posits that high cost Chinese ore mines will shut and be replaced by our cheaper ore, keeping the price around $120 per tonne, is weak in part because it assumes the Chinese won’t protect local producers.”

    And to support your contention these reports out of China;

    http://www.mining.com/chinese-iron-ore-mining-is-already-out-of-whack-and-now-500-million-tonnes-of-new-capacity-is-coming-38834/

    You will need to convert this one to English. Google does a pretty good job;

    http://info.glinfo.com/12/1026/07/B8E63115BE85E14E.html