Or, put more diplomatically, “self-defeating”, from Goldies:
The iron ore industry continues to expand by building new mines and by operating existing mines more efficiently, but the increase in supply is not linear. Our analysis of weekly freight activity indicates that iron prices respond to variations in supply from the key export terminals in Brazil and Australia. After a strong start to the year, iron ore exports from these regions misfired in April partly as a result of weather disruption. The modest improvement in export volumes in recent weeks does not seem enough to replenish low inventory levels in China, and above-trend prices should continue in the short term, in our view.
The current rally provides some welcome breathing space to marginal producers; spot prices are currently trading slightly above our US$60/t estimate of marginal production cost (inclusive of sustaining capital and overheads), and some mines previously flagged for closure are restarting once again. However, the market outlook remains unchanged. In our view, prices must fall below the cash cost of marginal producers in order to force the mine closures required to balance the market. On that basis, high prices that partially reverse the process of slimming down the industry cost curve can only result in additional closures down the road. Therefore, we think this rally is living on borrowed time.
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.
