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...Stone me if you must, but I reckon the alarmist headlines about iron ore are a little over done. We’re currently trading at a little under $US100 a tonne, a long way above the lows of $US60 a tonne in 2009. Also, this is a thinly traded and volatile commodity, one affected by all kinds of changeable micro-economic as well as macro forces. Spikes of 5 per cent-10 per cent are commonplace.
The fundamental backdrop: The macro story: Growth in demand for iron ore has been falling while supply has started increasing at a greater rate - Chinese steel mills have been demanding less ore, while the Australian miners have been supplying more. This is most definitely a short-term headwind for the price. And yet demand is not drying up either. Far from it, Chinese demand for foreign iron ore is still growing year-on-year on an absolute basis - steel production is expected to peak around 2026.
The micro story: The catalyst for the recent fall in the iron ore price was an exogenous shock. Chinese State-controlled banks changed their loan requirements to the steel mills - effectively requiring 20 per cent repayments on outstanding debts – in a push to make the industry more efficient, and to drive out less productive and high polluting operators.
If iron ore could talk, it would probably say: “Reports of my death are greatly exaggerated.” ....
