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Iron ore falls, is the $A next?

20 May 2014  |  Economics

The once in a generation iron ore boom that transformed the Australian economy looks over. The iron ore price looks headed down as China eases demand. Bloomberg reports:

"Iron ore slipped below $US100 a ton for the first time in almost two years on speculation a home-price growth slowdown in China, the biggest user, will dampen demand and worsen the global seaborne glut.

oreOre with 62 per cent content delivered to the Chinese port of Tianjin fell 2.2 per cent to $US98.50 a dry ton today, the lowest since September 13, 2012, according to data from The Steel Index. The commodity dropped 27 per cent this year, after falling 7.4 per cent last year.

Iron ore entered a bear market in March as the world’s biggest miners including BHP Billiton and Rio Tinto boosted output as economic expansion in China is forecast by analysts to slow to the weakest since 1990.


The commodity used to make steel was expected to be below $US100 going into 2015 as the surplus builds, Goldman Sachs said this month.

“Slowing demand, especially in the property sector, is one of the key reasons” for the price-decline, Helen Lau, a Hong Kong-based analyst at UOB Kay Hian, said. “We’ll need large-scale stimulus on a nation-wide level or, for the sector specifically, a big ease on tightening measures for prices to turnaround.”

The global seaborne surplus will jump from 14 million tons last year to 77 million tons in 2014 and 145 million tons in 2015 as exports from Australia and Brazil increase, according to Goldman Sachs.

China is switching focus more on consumers than large building projects. Home prices last month climbed in 44 of the 70 cities tracked by the government compared with 56 cities in March, according to data by the National Bureau of Statistics issued on Monday.

That’s the fewest cities with price-gains since October 2012 when increases were recorded in only 35 on a monthly basis.

“Developers will not be in a hurry to build more homes. For houses that are under construction, they may slow down a bit because there’s still a lot of inventory anyway and sales are slowing,” Lau said.

Stockpiles at ports in China rose 1.8 per cent to a record 112.55 million metric tons in the week to May 16 from a week earlier, according to Shanghai Steelhome Information Technology. Inventories climbed 30 per cent this year.

Iron ore futures on the Singapore Exchange fell 2.6 per cent to $US97 a ton on May 19, the lowest level for most-active futures since the contract started in April 2013."

The easing if iron ore may also affect the $A. Part of the currency's strength is due to higher interest rates than in the US (the interest rate spread). But that is narrowing:


The strength of the $A is not just due to the interest rate differential. It is also a proxy play into China. Investors who want to punt on China cannot do so directly because of the yuan's being fixed to the $US. So they do it in other ways, the $A being one. As China eases, so will the $A.

There are also some dark signs on Australia's credit rating, which could presage a weaker $A:

"Ratings agency Standard & Poor’s is warning Australia’s prized AAA credit rating could be reviewed unless substantial cuts are made to the budget in coming years.

In an unusually forthright warning, a lead sovereign analyst for S&P, Craig Michaels, said he was counting on the Abbott government to win Senate approval for at least “some” of its $37 billion in planned savings against opposition from Labor, which has pledged to veto about $18 billion in cuts and tax rises.

“We’re looking to see the government improve budget performance over the next few years,” Mr Michaels said in an interview.

If it looked as though “sizeable budget deficits were considered acceptable at the political and the community level then we might reassess, certainly, government commitment and also potentially the trajectory for public sector debt,” he said.

A cut to Australia’s rating would drive up the government’s borrowing costs and be a huge political blow.

S&P’s comments may serve as a wake-up call for opponents of the budget, including Palmer United Party leader Clive Palmer, who argues there is no need for big cuts to the $48 billion deficit because of the AAA rating."

Those wishing to take advantage of a strong $A to diversify offshore may need to be quick.




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