Daily iron ore price update (OMFG)

No need to adjust your TV set. The following ferrous complex numbers for August 19, 2021 are correct. Spot collapsed. Paper recovered some poise overnight. Steel is being sucked into the vortex:

We’re now down over $100 in a couple of months. Generally speaking, when we see a spot price collapse of this magnitude, it signals a short-term bottom.

However, sadly for iron ore, the price is still VERY HIGH and market conditions for it are VERY POOR. So I do not think that this crash is over in any time frame longer than the end of your nose.

The entire run-up in iron ore was fueled by a stimulus bubble in China. It has popped. Mandated steel production cuts are only ensuring that that weakness is jammed upstream to raw materials faster than usual.

In such circumstances, any and every commodity does just one thing. It falls to the highest cost marginal producer to pressure it to reduce volumes and thereby stabilise prices.

That price is around…wait for it…$80. That is the base case for this adjustment over the next 6-12 months.

But, if China decides to push the envelope and persist with its reform program, refusing to stimulate with broad credit for property construction, then that marginal cost production price will fall to more like $40.

Fortunately, that’s still a risk case given I expect Chinese growth will slow to levels that the CCP can’t tolerate.

But you never know your luck when dealing with an angry CCP.

Houses and Holes
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Comments

  1. Diogenes the CynicMEMBER

    Great call by MB on this. You’ve been way ahead of the market talking heads.

        • 68c really does seem tame given all the fuss he’s making ie comparing it to the “2015 playbook” commodity crash. I believe the aud will go a lot lower personally.

      • The Traveling Wilbur

        Great call indeed.

        You should dig out 3d’s old subscription email address and send him the image of today’s spot price and the delta that got it there (no pun intended).

        As to longer term implications for IO and Australia and China not buying, I still disagree; China not buying from Oz won’t crash and hold down the price. But the price they’ll be buying Oz IO at until then will certainly be lower – you’re tracking brilliantly on that.

        At least we agree on inflation. Which clearly didn’t last long enough to be even a mini-cycle.

  2. It appears that the real reason that iron ore is plunging is that China is not buying Australian coal.
    It goes like this:
    China refuses to buy Australian coal
    This leads to a coal shortage in China, and the price of Chinese coal increases.
    Coal fired electricity producers can not make profit as coal is too expensive. This leads to a shortage of electricity.
    The Chinese government try to reduce electricity demand by ordering EAF steel producers to shut down. EAF steel producers use both scrap and iron ore as inputs.
    Steel production reduces, and hence iron ore price reduces.

    However, now there will be a steel shortage and the Chinese steel price will sky rocket.
    And iron ore will return to $200.

    China is screwed, and Australia will print money from the increase in price of coal and iron ore.