Iron ore is going to crash

Iron ore prices for February 2, 2020:

Everything smashed. Market expectations of a tightening market are being dashed:

  • Crushed Chinese steel mill profitability has triggered destocking.
  • COVID outbreaks have hit Chinese demand so steel prices are falling as well, meaning more destocking.
  • Chinese monetary and fiscal tightening will intensify as the year deepens, especially on the vital property development sector.
  • Chinese authorities have crushed paper volumes and are coming after steel output.
  • La Nina has so far failed to inhibit supply very much in Australia (or Brazil):
  • New supply is popping up all over.
  • China’s trade war on Australia seems to have eased as well, in part thanks to the perverse impact on iron ore.

We’re in for a good old fashioned crash here. Expect a rebound after the Chinese New Year when steel mill profits are restored. Then another big crash in May as Chinese slowing develops into market consensus.

Unless Vale butchers its supply ramp up again (via screw-ups or weather) by the time of the seasonal September shakeout we could be back at $70-80.

When iron ore moves, it moves big.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. Jonathan Rubenstein

    Easy to fix – just get Gina to pay for Aussie special forces to blow up Vale’s Brazilian tailings dam again.

  2. pfh007.comMEMBER

    If China really wants to give us spanking….and it seems that way……iron ore and students will beat a few sea roach (lobsters) bans any day.

    But we have heard about finite Chinese demand a lot over the years.

    They must all have 2 toasters by now.

    Good time to cut volumes before they get cut at a time of CCP choosing.

    • Gambits can pay well, actually quite well.
      But it is estimated 82% of gambits end up in losses and further 4/5 of those end ul with massive catastrophic loses.
      There is no benefit in losing revenue for a gambit that has little or no chance to pay or its effects are meaningless.
      China has no motivation to weapnise IO as long as it is in its benefit to pay less for it. They will not turn the tap off for IO until doomsday. Plenty of other non-self-harming options at theirs disposal atm.

      • pfh007.comMEMBER

        “..There is no benefit in losing revenue..”

        Cutting export volumes will not result in a loss of revenue.

        It will drive up the price to the lowest price competitors can meet and increase returns to Australia.

        Any time other competitors try to enter the market we can crunch their investment decisions with an increase in supply.

        If want to be the Saudia Arabia of dirt we should start acting like one.

        • 1. Saudi comparison is not applicable as -=everyone=- wants oil, whereas IO is mostly one major player
          2. Aus could somewhat weaponise IO in Saudi style but the political spat and US lap dogging make too heavy encumbrance. China will see it not as an economic tool but (rightfully) for what it is: political pressure and aggression.
          3. Even if price power create some leverage for Aus in terms of IO, the power of that will not be seen as economical tool and is guaranteed to make the response political and irrational.

          Much the same as China will not touch IO in any political piss contest Aus should not too. It is a nuclear option and it will yield commensurate response. Toothless tiger can only project fear until the teeth has to be shown.
          If China decides to not buy IO from Aus and cost benefit is acceptable for them, flooding the market will yield sweet FA for us. OTOH, if we actually made anything else other than houses and IO, (e.g. like US), the game would be totally different.
          Goggle and Android scare is a good tale tale.

          • pfh007.comMEMBER

            Australia, like any other country, is perfectly entitled to limit exports of any products it produces.

            China and plenty of other countries do it all the time.

            There is a compelling argument that Australia should limit exports of iron ore as the current levels of production are resulting in a seriously unbalanced economy.

            The reasons you give are weak and are nothing more than the usual excuses that international mining lobby feed to the government it funds in Canberra.

            The idea that China will not use its position as a major buyer of iron ore for geopolitical purposes is wishful thinking. As soon as China is in a position to do so it will punish Australia for its foolish addiction to excessive iron ore exports.

          • I did not say Aus in not entitled to do what it think is in its interest. I said it is not in Aus interest to cut the only branch it sits on until we have something more to offer to the world.
            Sadly, Canberra does not see that as an option, I mean economy that does more than IO.
            I do agree that China will use its leverage over IO and this is what I am saying: Aus has more to lose from restricting IO exports, much more, incomparably more. This is usually dismissed by politicaly bedazzled thinking we have bigger wiener because we sit in US lap.
            The leverage China has over Aus is not because we were cornered but because we went but naked and oiled into gaye aurgy and asked for some fun.

          • I did not say Aus in not entitled to do what it think is in its interest. I said it is not in Aus interest to cut the only branch it sits on until we have something more to offer to the world.
            Sadly, Canbera does not see that as an option, I mean economy that does more than IO.
            I do agree that Chi will use its purchasing leverage over IO and this is what I am saying: Aus has more to lose from restricting IO exports, much more, incomparably more. This is usually dismissed by politicaly bedazzled thinking we have bigger wiener because we sit in US lap.
            The leverage Chi has over Aus is not because we were cornered but because we went but naked and oiled into qay aurgy and asked for some fun.

        • Great strategy but if you can get the pollies in Canberra to do that it will be a miracle, they cannot ever get gas reservation right. Whoever they are the working for it is not the common man.

    • Shades of MessinaMEMBER

      I reckon the top was around 10 years ago when that bloke proposed an indoor ski slope ala Dubai.

    • innocent bystanderMEMBER

      I have thought we would get a good idea by April.
      what that idea is, I have no fvcken idea – anything is possible.

    • AUD is just a proxy for Ore demand, expect housing crash to resume in March – as everyone predicted LAST MARCH.

  3. Or, its because I was stating at the end of last year – price peaks are ALWAYS due to stimulus as apartment construction is incredibly static, coupled with ending the ban on scrap (20% of steel market) – literally called it a month ago. Here we are MB – now delete this post and ban the poster, as usual.