Iron Ore Sinks, China Slows and Aussies’ Worry

COMMENTARY – ProspectingJournal.com – Iron ore prices continued their slow downward spiral this week, hitting their lowest level since 2009. Down over 16% this year alone, iron ore isn’t the only commodity that has been suffering joining hard coking coal in the basement. Falling iron and coal prices quickly bring one major player into mind – China. Nothing implies China’s slowdown like a decline in steel making ingredients.

 The downward pressure on price has been caused by high stockpiles at Chinese mills combined with higher exports from Brazil, Australia and other producers.  Speculators doubt any meaningful recovery in the short term. One commodity broker even went as far to note that “watching this market is like watching the titanic.” Despite the low demand and price for steel, many iron ore producers still have plans to increase production in the near and long term.

Iron ore’s bottom price is allowing a popular theory to be tested, the Chinese floor theory. The theory states that it costs at least $120 for a Chinese mine to produce a tonne of iron ore. Therefore when prices drop significantly below $120, Chinese mills will import from overseas. An interesting dichotomy has emerged though; as global prices for iron ore have plummeted China’s price for domestic iron has fallen by far less.  This premium price on Chinese iron ore has allowed many mills to keep operating profitably. This premium reflects other benefits China’s domestic iron ore has for its clients such as quicker delivery time and willingness to supply smaller qualities.

The China dichotomy that is emerging along with the stinking iron ore prices has one nation particularly scarred – Australia. Australia’s economy, which has been particularly strong throughout the recession due to its close relationship with China, is beginning to show signs of cracking. “Australia has two million unsold homes, with another 30 million under construction. There is a glut of iron ore and the price is falling. Where does that leave Australia? Horribly exposed, quite obviously. It has an over-valued currency, an over-valued property market, and its major customer is now desperately pulling every available policy lever in the hope of avoiding a hard landing.”

It seems a bit too early to say that China’s downfall is imminent, but we know are Aussie friends down south will be watching the Asian giant and the price of it’s dear exports nervously in the meantime.

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ProspectingJournal.com

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