From Deutsche:
What does iron ore into ‘the 30s’ mean for the economy, policy and the AUD? At least some of the weakness in iron ore prices reflects the increase in supply out of Australia. As Figure 1 shows, the slump in iron ore prices this year has coincided with strong growth in Australian exports. Of course it is possible that iron ore prices could fall to the levels below the costs of major Australian producers and hence see lower local production and exports. These points are around $US36/tonne and $USD26/tonne. However, a lot of non-traditional and uneconomic production would need to remain in market to sustain those price levels in our view; something that is possible, but unlikely.
A weaker iron ore price would, ordinarily, impact the outlook for investment. However, the mining investment boom is now long past. As a result, mining investment will continue to fall over the coming year largely independently of commodity prices (with any changes in maintenance capex ‘at the margin’ from a macro perspective). Of course, lower commodity prices do impact the profitability of mining companies – although with the sector having a large share of foreign ownership much of the weakness in profitability is offset by a lower net income deficit. As far as the labour market is concerned, mining employment will remain under pressure – although that has been the case for some time with the shift from investment to production probably having had a larger impact on sector related employment than lower commodity prices (something that should remain the case as long as prices remain above major Australian producer break-evens). And as we have been noting for much of the year, the pick-up in employment outside the mining sector has been sufficient to see the unemployment rate move sideways.
