World iron ore prices are on the edge of slipping under $US100 a tonne and the latest two year low could come sometime this week after another fall in the mineral’s price on Friday night, our time.
It’s a reminder for everyone this morning that for all the chit chat about the budget, and the moaning and groaning about what was in or out, the real story for the Australian economy remains what happens in China.
According to the Steel Index the global price of the benchmark 62% iron oxide iron ore fell to a new 20 month low on Friday night of $US100.70 a tonne.
That was the lowest the price had been since September 2012, when prices were recovering from the most recent low point of just under $US87 a tonne.
The fall happened after more bearish signs from the Chinese steel industry and persistent concerns about rising supplies of ore.
And in the Singapore futures market, the price of the same ore in the June contract fell to $US100.65, the lowest the so-called front month (the one most actively traded by the market) fell to $US100.65. That was the lowest in 13 months.
The falls followed yet another drop in the price of steel rebar (reinforcing steel) on Shanghai to a new low late last week.
But at the same time figures from the China Iron and Steel Association revealed that steel production rose to 1.824 million tonnes a day in first 10 days of May, up 1.5% (which is down on the 2% rise seen for all of April).
It may also pay to be reminded about what the Reserve Bank said in its latest Statement on Monetary Policy earlier this month about the risks associated with the Chinese economy.
"Further slowing in Chinese demand for steel would provide a downside risk to iron ore and coking coal prices, and hence the terms of trade.
"It could also lead to the closure of some higher-cost Australian coal producers and the cancellation of a number of coal investment projects.
"If the exchange rate was to depreciate with the decline in the terms of trade, there would be some offsetting boost to service and manufactured exports from a lower exchange rate, but any substantial weakening in Chinese steel production could be expected to reduce GDP growth over the forecast period," the RBA warned.
In other words, the health of the Chinese economy, and specifically the Chinese steel industry, is essential for continued solid (but subtrend) economic growth in Australia in the coming year.
But for the moment there’s no sign of a slump.
Yes, steel demand is weak, but production is still growing, and Chinese demand for our iron ore is running at record levels.
We wrote last week of the mixed data for April, but how imports of iron ore, especially from Australia, had held up, and how Chinese steel production was still growing, although at a slower rate than in 2013.
Chinese crude steel production rose 2.1% to 68.84 million tonnes, or a record-high 2.295 million tonnes of production a day, according to the National Bureau of Statistics said last week.
Output in the first four months rose 2.7% on year to 271.86 million tonnes. It’s not as fast as we saw in 2013, but its better than many western ‘experts’ forecast.
Chinese iron ore imports continue to rise strongly, as it seems Chinese mills are taking advantage of the price drop, and using the ore as security for getting finance from so-called shadow banks.
In April, China’s iron ore imports topped the 80 million tonne mark – for the second time this year: more than 86 million in January and 83.4 million tonnes last month – which was up 12.75% from March and a huge 21% from April 2013.
Iron ore imports in the first four months of 2014 were 305.3 million tonnes, were up a huge 21% year on year.
It is also cheaper and more efficient (for the yield of crude steel from each tonne of ore from Australia or Brazil) to buy imported iron ore at current prices, than pay cheaper prices for lower grade domestic ore.
But regardless of this strong buying, global prices have sunk through this year.
The slide in global iron ore prices continues to trigger bouts of nervousness on the local market last week, as it has done off and on now for most of this year.
And the falls in the prices of BHP Billiton, Rio Tinto and Fortescue Metals have been mixed.
At Friday’s close of $4.58, Fortescue shares are down 26% from their high in February of $6.22.
Rio Tinto shares have fallen 13% to Friday’s close of $61.95, from their February high of $79.30.
But BHP is the outperformer, its shares are only down 4.4% from their high of $39.79 in February at Friday’s close of $38.08.
BHP shares rose 2% last week, Rio’s were up 1.6%. Fortescue shares fell sharply.
BHP is a more diversified miner and its other interests – petroleum, copper, coal and other miners (silver and nickel for example) have helped cushion the blow from the 25% slide in iron ore prices this year.
Macquarie has cut its iron ore price forecast for 2014 from $US115 a tonne to $US100 tonne in recognition of the recent slide.
