The Pilbara Killer: A Warning for Iron Ore Investors — Outlook for Iron Ore
Today’s Profit Watch dons the deerstalker hat and picks up the magnifying glass.
The case: the outlook around iron ore.
You already know it’s barnstorming its way through 2020 thanks to heaving Chinese investment, and COVID-19 ripping through Brazil.
What else can we glean from what’s going on in the world?
Join me, my dear Watson, while we look for clues…
Let’s begin at the start. Why is the iron ore price so high anyway?
We know about the disruption in Brazil. What else?
Well, there’s been the spending of big bucks on construction inside China to help offset the economic downturn and create jobs.
Here are some interesting points around this…
The Reserve Bank of Australia released a paper on the Chinese property market as part of their recent quarterly bulletin.
If you thought Aussies were mad about property, the Chinese give us a good run for their money. 60% of household assets are real estate.
A good chunk of these apartments aren’t even for rent. They’re a store of value!
Here’s the beef: 25% of China’s steel consumption is for residential property.
Steel demand equals iron ore demand!
However, the Chinese government has tried to resist stimulating the economy via the property sector since about 2016.
It’s done it a different way instead: infrastructure!
That uses plenty of steel as well. All good so far. The word right now is that China’s demand for iron ore should hold out for the rest of 2020.
The demand for 2021 is a little murky…but we’ll see, as we get closer.
But you and I are going to look a little further out than even that.
That’s because the China correspondent for the Australian Financial Review made the following comment last week about iron ore…
‘Analysts, however, warn Beijing is looking for long-term alternatives to Australian imports.’
You don’t need me to tell you the reason. Beijing can get hot and bothered with the barley growers.
It doesn’t quite have the same muscle over BHP and Rio Tinto — yet.
Australia provides over 60% of Chinese iron ore demand.
That brings us to China’s One Belt, One Road (OBOR) project.
This is how China will eventually be able to give Australia the middle finger in a big way…
A big project on the west coast of Africa
I’m sure you’ve heard of the OBOR initiative. China is prepared to spend big in countries all over the Eurasian land mass and along the coasts of the Indian Ocean.
It has lots of objectives. It gives Chinese companies and workers a steady flow of work.
But it also helps lock in China’s ability to ship raw materials from all over the world.
Right now it’s very dependant on bringing in a lot of these supplies through the South China Sea.
Geopolitical strategists call this a ‘chokepoint’.
But it’s also why we should pay attention to the following story.
From The Australian…
‘The giant “Pilbara Killer” Simandou iron ore deposit in Guinea could be closer to development, amid reports Chinese steelmaking giant Baowu is preparing to take a stake in its proposed $US20 billion ($30.2bn) development…
‘Simandou is seen as the best undeveloped iron ore deposit in the world…containing up to 14% of China’s current iron ore needs.’
This deposit is located in West Africa and comes with a catch. Someone needs to build a 650-kilometre railway to get the ore from the mining region to the port.
That alone would cost US$5 billion.
A private company might baulk at such a cost.
But under China’s One Belt, One Road project it makes perfect strategic sense.
China can source high-grade iron ore, diversify away from Australia, and generate work in the meantime.
What’s not to like?
Not much if you’re Chinese. But if you’re invested in Australian or Brazilian iron ore companies, a lot.
Now, Guinea iron ore is not going to start crossing the ocean today, tomorrow, or even next year.
But if you see this project — and others like it — go ahead, you know the days of Australia’s iron ore boom are numbered.
China’s urbanisation is about half done anyway, too.
Make the most of the rich dividends from BHP and Rio while they last.
The Pilbara killer is coming.
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.