What could cause iron ore price to tumble
Calls to reintroduce a mining tax could signal that the price of Australia’s most valuable export may have finally hit its peak, experts have warned.
The price of iron ore, our number one export and a critical ingredient in steelmaking, has been on the up in the first quarter of 2021, with China snapping up 444.9 million tonnes – despite everything that has transpired between the nation and Australia since the onset of the coronavirus pandemic.
It rose again on Tuesday to $US222 a tonne, amid ongoing supply issues and record steel production in China driving demand.
While it’s hard to say when, exactly, the bubble will burst, it could be on its way – with Atlas Fund Management’s Hugh Dive telling the Australian Financial Review that five events could lead to lower prices.
There are similarities between now and 2011 – the last time the iron ore price was very high – with the biggest difference being that now, supply response is slower.
Mr Dive told GEM Capital Financial Advice Mark Draper that the period between 2012 and 2016 “provides a good road map as to how the ‘air’ could get taken out of the iron ore price, though the situation is likely to unravel faster this time”.
Five triggers that could lower iron ore price
According to Mr Dive, the following five events could lead to lower iron ore prices:
• Brazil – the second-largest iron ore producer and currently experiencing supply constraints – moves back to full production “of about 380MT a year with goals to increase to 400MT”
• Chinese consumption of iron ore falls “as the impact of stimulus measures fade”
• Skyrocketing prices providing an incentive to increase production
• New entrants into the market focusing on “producing their own iron ore”
• China shifting to using “electric arc furnaces (EAF)” instead of iron ore and coking coal to produce steel
If iron ore prices drop, deputy head of research at InvestSmart, Gaurav Sodhi, told Draper that profits would also fall – but those “high-cost producers” that have entered the market to take advantage of the current upward trend would be most at risk.
Premier urges PM to use tact with China
It comes after West Australian Premier Mark McGowan’s warning to Prime Minister Scott Morrison to stop antagonising China, calling for “a national reset in that relationship”.
The Premier has been one of the federal government’s most outspoken critics on the issue, largely because his state is the largest iron ore producer in the world.
Speaking at the Australian Petroleum Production and Exploration Association conference on Tuesday, Mr McGowan told around 1700 delegates that West Australian exports “carry the country”.
“We’ve always put a lot of effort into maintaining cordial and successful relationships with our investment and trading partners, whether it’s the United States, the United Kingdom, Japan, India, Korea – or China,” he said.
“As a country, we can and should have a good relationship with our largest trading partner, China.”
Mr McGowan told the nation’s biggest oil and gas conference that it was in Australia’s “security and economic interests” to do so.
“The LNG industry, that exports to China and knows there are many international competitors, would understand that better than most.
“The federal talk of conflict, of trade retaliation can and must stop.”
Mr McGowan said Australia should always protect its interests, institutions, independence, democracy and freedoms.
“That goes without saying. But how is it in our interests to be reckless with trading relationships that fund and drive our prosperity and our nation forward?” he asked.
“This isn’t about kowtowing to other countries … it’s about having a bit of tact and a bit of savvy – it’s what was commonly known as diplomacy.
“It’s not beyond us as Australians to do that in our national interest. There needs to be a national reset in that relationship.”