Australia undermining global iron ore prices
Iron ore production and shipping capacity is rising, but demand is growing more slowly.
Weaker demand from China is one factor undermining iron ore prices, but Australia’s big players are far from blameless.
They are working to eliminate competitors and a group of high-powered businessmen are the first casualties.
Tumbling iron ore prices are starting to claim their first Australian victims.
Northern Territory iron ore producer Western Desert Resources, chaired by former Coles-Myer chairman Rick Allert, has gone into administration, taking some high-profile investors with it.
Among the losers are pokies billionaire Bruce Mathieson and Fairfax Media chairman Roger Corbett.
Western Desert Resources was beset by operational issues and weather problems since it started operating just nine months ago when the iron ore price was $US135 a tonne. Since then, prices have plunged nearly 40 per cent and another 20 per cent fall is possible.
“That seems a little extreme, but I wouldn’t say it’s out of the question. You know, we could see prices continue to [descend] through the 80s into the 70s [$US per tonne],” said UBS global commodities analyst Daniel Morgan.
“What we’ve seen the last few years is severe price corrections at around this time of year.”
With China’s economy and building boom cooling, iron ore demand is softer and supply from the rest of the world has been steady.
Australian output ramps up
The ramp-up in output has come from Australia, which now accounts for half the world’s production.
The iron ore market has become more competitive. Fortescue has come in, Gina Rinehart’s Roy Hill is getting closer to first production, while Aquila, Baosteel and Aurizon are investigating whether another rail line in the Pilbara should get up.
“The consolidated nature of the supply side has slowly been weakening. I think that’d be a concern for the majors, and so it may not be such a bad thing if prices were to fall,” Mr Morgan added.
Lower prices are not the best thing for the economy though.
“Iron ore makes up about 1 in every $20 that the Australian economy earns in every year. It’s a very big part of the economy,” observed Chris Richardson from Deloitte Access Economics.
Mr Richardson does not think the iron ore price will revisit the higher prices of last year.
“The current decade is likely to see further, if more modest, increases in demand, but a boom in supply. The miners will dig deeper and those prices will come down,” he added.
However, some are expecting demand from China to pick up as buyers are forced to build up stocks ahead of the harsh winter months.
“On average, prices in November the last few years have lifted I think 5 per cent, in December a further 7 per cent,” Daniel Morgan noted.
“So although prices are weakening, and I expect further weakness in the short term, just around the corner, November-December, we should have a reasonable price recovery.”
Reasonable, but maybe not a full recovery.