Source: Australian Financial Review
There’s no shortage of irony in the fact Chinese steel makers have asked their government to help “sustain order” in the iron ore market. Because it is Chinese government policy that is stopping one of the usual market responses to soaring prices.
Iron ore futures steadied on Monday on the Dalian Commodity Exchange after sharp falls in futures and spot prices on Friday following news of a meeting in late June between eight big steel producers at the China Iron and Steel Association (CISA).
The group questioned whether there were “non-market factors” behind this year’s 70 per cent jump in the price of iron ore, which took the spot price to $US126.50 a tonne on July 3; the price drifted back to $117.50 on Friday after the CISA bared its teeth.
While steel makers are speaking darkly of speculation and dodgy trading mechanisms, the view from within Australia’s mining giants is that the iron ore market is nothing like the copper and oil markets, where financial liquidity is deep and speculation can and does drive trade.
For iron ore, market fundamentals still matter most of all.
On the demand side, China’s steel mills are running hard as the government tries to stimulate the economy through its trade fight with the US. And while some particularly dirty steel makers have been taken out of the system in China’s anti-pollution push – which should notionally weigh on prices – the majority of steel makers are still buying the best quality ore they can, to ensure they stay relatively clean and green.
On the supply side, the big story has of course been the shuttering of production by Brazilian giant Vale following a tragic dam disaster earlier this year. Some production has restarted, but no one really knows when Vale will get back to past glories.
In addition, BHP and Rio have all had production issues in the past 12 months, from weather disruptions and mishaps (such as BHP’s runaway train) through to operational problems (including at Rio Tinto’s Greater Brockman hub in the Pilbara).
All this means that the overall global production network is stretched tight. While Australian shipments jumped sharply from the March quarter to the June quarter, this was really about recovering ground lost earlier in the financial year.
But beyond this, China’s other big supply issue is at home.
During previous price spikes, Chinese domestic production has kicked in. But this is really poor quality iron ore – 25 per cent grade, compared to the 60 per cent grade Australia and Brazil are famous for – produced by tiny mum-and-dad-style operations.
The production is so dirty that the Chinese government doesn’t want this swing capacity to restart this time around.
To be clear, the big Australian miners don’t believe there has been structural change in the rump of the iron ore market.
Vale’s mines will eventually come back into the market, Rio will get its mine planning sorted and BHP will string together a few uninterrupted quarters.
But how quickly the price retreats is not clear. Certainly iron ore’s long-run average price of $US55 a tonne looks a long way away while the Vale picture remains so murky and trade tensions force China to keep its foot on the stimulus pedal.
So in the meantime, Rio and BHP will enjoy their rare double windfall of a high iron ore price and a low Australian dollar, which is helping to keep costs lows and huge amounts of cash flowing.
Finally, it’s hard to disagree with CFMEU Queensland mining and energy president Steve Smyth’s diagnosis of a safety crisis in that state, after the sixth fatality in 12 months on Sunday.
This death, at NRW’s Baralaba North coal mine, was followed a few hours later by a serious injury to a worker at Glencore’s Collinsville mine. And it came two weeks after the death of a worker at the Middlemount mine.
Ironically, the incidents happened after a meeting last week between the Queensland Resources Council, CFMEU and AWU and the state’s Department of Natural Resources, Mines and Energy. Queensland Mines Minister Anthony Lynham will now hold further talks.
These deaths are unfathomably heartbreaking for the families, friends and workmates of those killed. But they are also unacceptable in Australia’s mining sector in 2019. Smyth is right when he says there needs to be a major safety reset in the state.