The Iron Ore Market — Australia’s Luck Rests on Red Rocks

The Iron Ore Market — Australia’s Luck Rests on Red Rocks

Dear Reader,

Normally around this time of year it’s a struggle to find a topic to write about.

A week out from the quietest trading period of the year has normally been a time for reflection. A discussion on what we got right, what we got wrong and how we can prepare for the new year ahead.

2020 however, has been anything but normal.

Even as the year draws to a close — and out of office replies start appearing in my inbox — the markets are anything but quiet.

Fresh news continues to roll in.

Aussie bank stocks are up. Mining stocks are moving higher. A handful of retail stocks are defying the economic gloom and lifting. Exploration companies are still announcing drill results and telling the market about their programs for next year.

And in spite of the war of words between China and Australia, the Aussie dollar is flying.

It’s not a question of what to talk about, it’s more a case of where to start…

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Will the Aussie dollar fall?

I’m currently waiting on a couple of parcels to arrive from Amazon.

With the Aussie dollar trading at 75 US cents this morning, I thought I’d take advantage of our strong currency and get some of my Christmas presents from the States.

Perhaps the most baffling thing in the market at the moment is that not only is the Aussie dollar rallying higher, but Aussie stocks are going with it.

As I wrote last week, both the Aussie dollar and stocks moving higher suggests our tiff with China might not be as bad as the headlines make it out to be.

In saying that, maybe the good times for our currency are about to come to an end. And that’s not because of trade escalations with the Middle Kingdom. More like, they’ve bought all they simply could.

The media has been little help this year in understanding what’s going on in the market. For Australia it’s been nine months focused on body counts and what Trump did or didn’t say.

With our local COVID numbers low — and Trump’s moves having less and less impact — there’s been a flip to covering our disintegrating relationship with China.

Yesterday’s headlines were focused on how Chinese steel companies aren’t happy with the price of iron ore, with The Australian writing:

The China Iron and Steel Association said the “iron ore pricing mechanism had failed” and its members were calling on Chinese regulators at the State Administration of Market Supervision and the China Securities Regulatory Commission to investigate iron ore prices and “severely crack down on possible violations of laws and regu­lations”. That threat saw iron ore tumble by nearly 5 per cent on Monday after prices of the commodity doubled since February, but experts said China’s claims of market failure were ill directed.

The thing is, fixing the iron ore market would be near impossible. And the article from The Australian mentions that Chinese officials only want to speak with BHP and Rio Tinto.

Apparently, there are already ‘open’ lines of communication between Fortescue Metals and Chinese officials. Most of us already knew that after former Fortesuce Metals CEO Twiggy Forrest brought out a Chinese diplomat to speak at a government press conference…

There’s been no collusion or trading manipulation.

The nine-year high in iron prices largely comes down to two things: Chinese demand for red rocks and Vale’s Brazilian iron ore mine consistently reducing production forecasts.

Chinese demand has been our gain. Vale’s ongoing misfortunes is a win for our three largest iron ore miners.

Nonetheless, the iron ore price may have peaked for now…

Steel to hold up their houses

It’s a risky business calling a market top. But that’s exactly what I’m about to do.

Much of the iron ore price rise this year has rested on the simple fact that China needed to work out how to get out of the COVID hole it created for itself.

The initial four trillion yuan (AU$800 billion) economic rescue package introduced in May this year was largely aimed at tax cuts and reducing costs for factories and merchants in the aftermath.

The Chinese Communist Party (CCP) opted to publicly introduce measures to support small traders, while denying the idea of more white elephant projects that we saw in the past.

That said, the Reserve Bank of Australia noted in June this year that to help mitigate the shock of COVID on China’s economy, it played loosey goosey with their property sector. With the RBA’s June Bulletin saying:

Despite the unwillingness to introduce stimulus, the severe shock to the property market as a result of the COVID-19 pandemic has clearly changed the near-term imperatives of property policy. As with actions in other industries, authorities have attempted to mitigate cash flow issues by directing concessional bank lending to firms facing demand shocks, and facilitating bond issuance by easing restrictions. Local governments have also implemented various policies to support developers, including additional flexibility in delivering properties and making it easier for projects to be presold.

This loosening of urban development means China has built the equivalent of 14,000 Eureka Towers this year alone (an apartment building in Melbourne that has 556 apartments in it).

That’s an awful lot of steel.

That sort of unexpected demand in the face of shrinking supply is going to drive prices higher.

It’s no secret that the CCP have a detailed urbanisation plan. What was surprising for the market is how some of those plans were brought forward. Unofficially of course.

Nonetheless, with a whole lot of homes going up into the sky, word is getting around the steel stock piles are shrinking going into 2021. It could be that it’s seasonal. Or it could be that the CCP has built all the homes it can for one year.

Which is it? Join me tomorrow to find out.


Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

PS: Australia’s Great COVID Recession — Learn which investments to accumulate and which ones to avoid in order to give you the best chance of preserving your wealth during the recession. Click here to learn more.