Value drops below $US200 a tonne amid China threats
‘May not happen again’: Warning as iron price drops below $US200 a tonne
May 26, 2021 7:01am
The Motley Fool’s Scott Phillips has suggested China’s short-term market intervention resulting in lower iron ore prices is hiding the Asian superpower’s bid to find a longer-...
Australia’s secret to sustaining some sense of economic normality throughout the pandemic recession has been iron ore.
The vital steelmaking ingredient has rocketed in value in the past year to an all-time high, and China, which makes far more steel than anyone else in the world, can’t stop buying it.
It means that everything we’ve heard about what China has been doing to our exports in the past year, like blocking our barley and wine, has been pretty much pointless from Beijing’s point of view.
Although it’s tough for producers in those sectors, the benefits of an increase in iron ore prices vastly outweigh an any damage done to the Australian economy by attacking other exports.
The windfall from the surging prices was heavily factored into the Morrison Government’s latest big-spending budget and has undoubtedly given Australia a major economic boost in these pressing times.
Ironically, it is mainly, although not exclusively, China’s fault that iron ore prices are so high.
Shiro Armstrong, director of the Australia-Japan Research Centre at the Australian National University, told news.com.au its has been China’s relentless demand for iron ore that has pushed its price up.
This graph shows the price of iron ore over the past year. Picture: Market Index
Source: Supplied
In a bid to recover quickly from the pandemic, China responded with a huge expansion in the availability of credit and a state-directed infrastructure cash splash that saw the demand for steel explode.
The plan was a success and helped China come out of its economic downturn more quickly than other major economies.
However, there have supply issues from other major iron ore producers like
India and
Brazil – which have both been crippled by the
pandemic – meaning China could only find ore of the quality and quantity it needed from Australia.
Downward trend in iron ore price
Over the past week, the price of iron ore has begun to tumble.
On May 12, prices reached an all-time high of $US237.57 a tonne, but in less than two weeks they have dropped close to 20 per cent – spooking traders around the world.
There was a slight uptick this morning, with the price rising to $US3.40 ($A4.38) a tonne or 1.8 per cent to $US191.65 ($A247.13) a tonne, but the trend appears to be a downward one.
This is because China – particularly over the past week – has been talking tough and reiterating its plans to drive down iron ore prices.
On Sunday, the National Development and Reform Commission (NDRC), China’s top economic planner, along with four other departments, held a meeting with industry leaders and vowed to severely punish “excessive speculation, price gouging and other violations” that they say helped lift prices.
Regulators would adopt a “zero tolerance” approach toward illegal activities and strengthen regulation of abnormal transactions and malicious speculation, the NDRC said in a statement.
The following day, iron ore dropped $US11.85 ($A15.28) a tonne or 5.9 per cent to $US188.25 ($A242.75) a tonne – following further sharp drops at the end of last week.
In a worrying sign for Australia, analysts have suggested to the
Australian Financial Review that “iron ore may not trade above $US200 ($A258) again”.
NAB head of commodity research Lachlan Shaw told the publication the warning signs were there before prices started to tumble and that it’s clear China is not messing around.
“Their [China’s] rhetoric stepped up dramatically last week with the state council and comments that speculation needed to be cooled,” he said.
“High and volatile prices are well and truly in the spotlight of the government. Their focus has sharpened.”
Morgan Stanley said last week iron ore prices had overshot what could be explained by the fundamentals of supply, demand, inventories and marginal cost.
“We’ve long highlighted the key risk around elevated prices would be some reversal of the bullish market sentiment and we’re seeing that reversal now,” Mr Shaw said.
He added there was “no question” the price could tumble further.
China warns of ‘Australia’s pain’
The skyrocketing ore prices are putting China’s economic recovery from the pandemic at risk, with companies and everyday Chinese citizens bearing the cost.
Chinese government mouthpiece the
Global Times said companies have already raised prices for a wide range of products, including refrigerators, washers and bicycles, citing rising costs.
However, analysts told the paper that China’s latest moves to crack down on “speculations and other market manipulation” is about to send “chilling waves across the globe”.
The
Global Times singled out Australia as the nation that will be hit hardest by the crackdown – given iron ore is such a dominant force in our exports – and accused us of “profiteering” from the rising prices.
“Among the most affected could be iron ore exports from Australia, which has benefited massively from the sky-high prices in its main export – emboldening officials in Canberra to continue on their relentless provocation against China,” the paper stated.
“While China’s reliance on Australian iron ore will likely continue in the foreseeable future, despite its efforts to diversify sources, sharp drops in iron ore prices would mean heavy losses in export revenue for Australia, which is already seeing declining trade with China in areas such as wine and seafood.”
It said that iron ore prices have dropped $US9.25 ($A11.93) per tonne since Beijing took action last week. It said that could translate into a loss of over $US2 billion ($A2.58 billion) in extra revenue for Australia based on the amount of exports to China in the first four months of 2021.
Australia’s iron ore exports to China are at an all-time high.
Source: Supplied
Flaws in China’s plan
The price of iron ore is dropping as Beijing implores its steelmakers to explore overseas ore resources and widen their sources of imports.
However, analysts have pointed to flaws in the plan saying China would need to develop hundreds of new mines in a short space of time to keep up with its steel production.
China has been the main driver of global metal markets for more than a decade and they’re showing no signs of slowing down.
Research house Capital Economics estimates that Chinese steel production rose by 7.5 per cent in April compared with March. While Capital Economics believes April’s production level may prove to be the peak, Australia’s miners have seen strong activity continue into May.
However, China is under pressure to reduce its carbon footprint and has promised to take steps to do so, which is at odds with its recent ramp-up in steel production.
Beijing started the year with a plan to drive steel production lower in 2021 to reduce pollution from the sector, which is estimated to account for about 15 per cent of the nation’s total emissions.
This clearly isn’t going to plan, with steel production hitting record levels, but the expectation is that the Chinese government will attempt to put the brakes on booming steel production in the second half of this year.
Given Australia sells over 60 per cent of its iron ore to China alone, this could mean we take a serious economic hit.
Australian mining insiders have told the
AFR they are wary of what could happen in the near future if China goes hard on its intervention in the steel market.
Global demand feeds industry optimism
However, they said the level of demand across the rest of the world is so strong that they see no need to panic.
“If China cuts steel production someone else will do it,” a source inside one of Australia’s big miners told the publication.
Feeding that optimism is the fact that the steel market around the world is red hot right now.
European steel giant ArcelorMittal this month lifted its steel prices for the 12th time since November, taking a tonne of hot rolled coil (steel) in Europe to €1050 ($A1655) – up by more than 80 per cent over the past seven months.
Roughly 60 per cent of our iron ore goes directly to China.
Source: News Regional Media
Meanwhile, Nucor, the biggest steel maker in the US is taking the stock market by storm and struggling to find workers to keep up with its expanding operations.
Even
COVID-19-ravaged India is going hard to increase steel exports, which rose about 26 per cent in the March quarter, according to S&P Global Platts.
But Shiro Armstrong told news.com.au if China and Australia try to diversify away from each other, then it will have serious consequences for both nations.
He said that the idea Australian mines can simply find other nations to make up for the iron trade we do with China “sounds fanciful”.
“It would be unrealistic in the short term, and likely in the medium and long term for both nations because it would come at a cost neither governments or mining companies will be able to bear,” he said.
Government intervention ‘could lead to more uncertainty’
He said the international market between Australia and China is one that has delivered.
“There is not good track record when governments try to intervene in the market, and China’s efforts could lead to more uncertainty and higher prices there,” he said. “None of their policies will work because they would lead to a huge hit to China’s construction sector.”
On the flip side for Australia, he said the demand for iron ore elsewhere in the world simply isn’t there – especially with prices as high as they are now.
The latest figures show that China produces over half of the world’s steel – producing over 996 million metric tonnes in 2019. The next highest was India which produced nine times less – with just over 111 million metric tonnes.
Mr Armstrong said it would be best for the governments of both nations to stay out of the market.
“We’ve had a very beneficial relationship with China that’s driven by market fundamentals. If both countries start looking to retreat from that open market … that’s a pathway to living standards in both countries,” he said.
China’s reliance on Australian iron ore – which has resulted in massive financial windfalls for our biggest mining companies – have come despite heightening trade tensions between the two countries.
China’s President Xi Jinping. Picture: World Economic Forum (WEF)/AFP
Source: AFPPrime Minister Scott Morrison. Picture: NCA NewsWire/Joel Carrett
Source: News Corp Australia
Outright ban is ‘unimaginable’
According to Chinese state media, NDRC spokesman Jin Xiandong blamed Australia for damaging trade relations.
“Consequently, we have to make the legitimate and necessary reaction, and Australia should bear full responsibility for such moves,” Mr Jin told the conference.
“We urged the Australian side to treat China-Australian co-operation objectively and reasonably, to treat Chinese companies fairly, end the disruption of bilateral trade and investment co-operation and take actions to bring forward bilateral relations for healthy development.”
But despite Australia and China’s icy relationship, an outright ban on iron ore is “almost unimaginable”.
Instead Beijing could resort to other tactics to make the export of iron ore more difficult for Australia companies, energy research and consultancy firm Wood Mackenzie told Bloomberg earlier this month.
“While an outright ban would be almost unimaginable, various forms of restrictions, delays or increased administrative burdens on Australian iron ore imports could yet happen,” Wood Mackenzie warned.
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