ALERT: Bloomberg has just corrected the iron ore closing price for Friday to no change at $135.90. Obvious that changes the below analysis but the Indian news is still significant.
Find below the iron ore price table for Friday March 5, 2013:
So what happened? There is bad news from India but the earliest reference I can find is for 8pm Indian time Friday. Still, it would explain the trapdoor. From Reuters:
Karnataka expects to reopen 19 iron ore mines this fiscal year, which were shut by a court in 2011, increasing supplies to local steel mills by 30 million tonnes, the head of its mines department said.
India used to produce 200 million tonnes of iron ore a year and sell about half of that overseas before bans on production aimed at curbing illegal mining in Karnataka and top producer Goa slowed production and exports to a trickle.
Nine mines have already restarted in Karnataka, which used to produce about 50 million tonnes before the Supreme Court imposed a ban on mining there nearly two years ago.
“(Another) eight to nine mines can be opened immediately this month, provided the honourable Supreme Court allows that,” said H.R. Srinivasa, director at Karnataka’s department of mines and geology. “A decision is expected this month.”
Last September, the Supreme Court allowed the reopening of 18 mines of Karnataka’s 170 total as long as operators fulfilled reclamation and rehabilitation criteria. The court is expected to add another 10 mines in the course of this year.
“Many companies are already working on reclamation and rehabilitation,” Srinivasa said, referring to court-mandated steps such as building fort-like walls around the mines and using rain water for sanitation.
Srinivasa heads the committee that recommends to the Supreme Court which mines are fit to reopen.
The court may eventually allow a total of 120 mines in the state to restart and shut the remaining 50 mines due to illegalities, according to the Federation of Indian Mineral Industries, which is also advising the top court.
30 million tonnes is a lot in this environment. Take a look at this chart which records the iron ore exports per month from Australia (white), Brazil (green) and India (yellow), courtesy of Bloomberg:
It doesn’t take Einstein to see that the mistakes of India’s socialists have directly benefited Australian capitalists. On the back of an envelope, the latest jump has added some 50 million tonnes per year plus driven up the price by at least $20 and probably more (Mac Bank reckons $40). It is no exaggeration to say that that has significantly boosted Australia’s economic status in the new year, reducing the trade deficit by a big figure, $1 billion plus per month as a wild guess.
So, the return of Indian iron ore, even some of it, is not good news for the iron ore price or Australia. No doubt the decline in recent spot prices generally has priced this a little but most of those falls have been based on Chinese demand worries.
There is one more point of news today worth mentioning. A year ago it might have had miners licking their chops but today should trigger a tremor of fear. From Bloomberg:
SGX AsiaClear, the world’s largest clearer of iron ore swaps, is scheduled to start a futures contract for the steel-making commodity next week as investors seek to bet on the pace of Chinese growth and swings in prices.
The Singapore-based clearing house, a unit of Singapore Exchange Ltd. (SGX), will offer the contracts from April 8 alongside the swaps, according to a statement on its website. One futures contract will be 100 metric tons compared with 500 tons for the swaps, the website shows. The planned start, which was delayed from February, was confirmed by Joan Lew, a spokeswoman.
…SGX may be seeking to meet an expected increase in demand from U.S.-based traders, said Kerry Deal, head of iron ore and bulk derivatives at Jefferies Hong Kong Ltd. “They look at this as a good China play. China is continuing to grow and this is a China-priced product,” he said in a phone interview.
The contract will be settled in cash against The Steel Index Ltd. for Tianjin, which refers to ore with 62 percent content delivered to the Chinese port. Trading will run for 12 hours from 8 a.m. in Singapore, and contracts will be offered for as many as 48 consecutive months from the current month, the website said.
“There’s a sense that in the long run, the market is shifting more towards a listed future, that regulators everywhere have a more favorable view of futures than they do of the OTC cleared swap,” said Deal, using the initials for over- the-counter.
…Trading in was near a record last month at 20 million tons, The Steel Index said yesterday. The total in over- the-counter swaps and options cleared by exchanges was up from 7.9 million tons a year earlier and compares with the all-time high of 20.3 million in September. Volume in the first quarter was 58 million tons, from 21.2 million tons in the same period last year and more than the total for all of 2011, it said.
My own view of commodities futures markets is that they increase not decrease volatility. It is not at all difficult to game them with perpetual roll over strategies. Perhaps Australia should consider a big mining tax coupled with an SWF to smooth out the income flows?
