The Chairman of Baosteel, China’s largest listed steel producer, said that there won’t be any more big stimulus programs and that as a result, steel production will grow much slower than in the past. Quoted in today’s Australian Financial Review, Xu Lejiang said:
‘Steel production is much higher than demand in China.
‘Iron ore production will also be way higher than demand shortly.’
Uh-oh. That’s not good for Australia. We’ve been riding the iron ore boom for 10 prosperous years. Demand has always outpaced supply, meaning prices kept going up. But in the past few years supply finally caught up. In the next few it will overtake demand.
That means falling prices, something you’ve seen over the past few months on waning hopes of more mindless stimulus spending. Apparently traders loaded up on iron ore at the start of the year on expectations that China would build a few hundred more cities that no one can afford to live in, pushing prices up in the process.
Now that it’s dawning on them that China’s new leadership won’t push the stimulus button, they’re shunning iron ore as a result. The price has fallen from around US$160/tonne at the start of the year to about US$115 now. The fall in May has been dramatic, so yesterday’s 4.2% bounce should not come as a surprise. But given China accounts for around 60% of global seaborne iron ore imports, and Chinese steel demand is falling, we expect to see iron ore prices under US$100/tonne before long.
That’s not a big deal for BHP and Rio, as their costs are so low they can easily handle such prices. But the mid-tier producers don’t have the scale to compete. Check this out…
Year-to-date, Fortescue Metal’s share price has fallen around 26%. Atlas Iron’s has fallen over 50%. Gindalbie Metals has lost over 55% of its market value while BC Iron has been an ‘outperformer’, down around 15%. Profitability expectations are rapidly changing for the smaller players in the sector.
This is the new world of iron ore — weak prices and excess supply. At least that will be the new world for the next few years…
You’ll see first-hand the effect of iron ore on Australia’s economy today, with the release of first quarter GDP data. At the time of writing the data is not out but we’re assuming a robust terms of trade will have a beneficial impact on national incomes in the three months to March. That’s because iron ore prices spent the quarter around the US$140/tonne mark, a big improvement on the previous quarter.
But in the current June quarter, the falling price of the red dirt will again detract from the terms of trade and national income, making today’s GDP release particularly useless, unless you’re Wayne Swan, who we can guarantee will milk it for all it’s worth. Which isn’t much, so ignore it…and him.
for The Daily Reckoning Australia
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