Iron ore stabilises

Following its free-fall, iron ore prices covered recently to push back over US$150/ton for the 62% grade.

Generally speaking, massive crashes straight down (35-40%) typically see a rebound – nothing falls in a straight line. Further, the fall was not sustainable either, we are talking about a vital industrial commodity, not a ponzi scheme crypto or stock. Iron ore, an input into steel, will remain in demand amid fiscal stimulus leading out of the CV-19 recession around the world.

And as mentioned in previous posts, generally we have seen an inflationary environment amid large scale monetary stimulus leading out of recession. The combination of fiscal and monetary stimulus bodes well for commodity prices in nominal terms. A continued crash in iron ore (e.g. 70 or 80%) would seem shocking in that context.

BHP has joined RIO in paying out a massive dividend of $2.74 per share, going ex-dividend shortly (2nd September). Since BHP shares have pulled back to ~$45, that represents around a 10% fully franked dividend on annual basis – huge in a zero interest rate environment. Clearly, the market is anticipating a pullback in commodity prices, or else the share price would be significantly higher than it is.

The bounce in commodity prices has led to the A$ edging higher again, now buying over 73c US.

The stabilization of iron ore is obviously a positive for Australia as concern grows over the budget damage amid widespread lockdowns. While many have acted as if ‘finances don’t matter’, the reality is another blowout deficit for budgets in 2021-22 adds to longer term pain for Australians. Rising public debt will necessitate higher debt repayments and the potential for taxes to increase and/or spending to fall in future years to repair the damage. This could show up in things like a move to broad-based land taxes or inheritance taxes, both of which have been raised. The piper will be paid.

Iron ore stabilises

Iron ore price crash deepens

Iron ore prices have continued their free-fall, likely to print below US$150/ton when the market updates tomorrow.

The prices of our majors were belted today: BHP – 6.35%, RIO -6.52%, FMG -6.15%. An expensive day for me as I enter one week in solitary confinement (lockdown).

“If something cannot continue, it won’t”. Iron ore has now lost a third of its price in a month. Mathematically, it cannot continue to fall at this rate, ergo it won’t. That may sound facetious, but it’s important to keep in mind. I remember I said the same to myself when the ASX fell from 7,000 to 5,000 quick-smart at the start of the crisis in 2020. I thought to myself, if it falls that amount again we will be below post-GFC lows – when the end of the world seemed upon us. Sure enough, the market bottomed shortly after and is now back over 7,000.

Yes, there are some valid concerns with iron ore. China is quite explicit that it wants to reign in excess production in the sector. Scrap is expected to play a more important role over time. Vale has had strong exports in recent months and new production is possible in Africa.

Yet, let’s think of the positives:

  • China has a history of backtracking on reigning in steel production
  • Massive money printing will raise the nominal price of commodities
  • Input costs are starting to creep up, meaning the marginal cost of producers is also. That cuts the scope for opportunistic investment by new entrants.

All-in-all, the severity of the crash has surprised me a little. However, I’m not currently panicking or thinking of selling my positions. I’ll reinvest the dividends into stock at now discounted prices and watch how the market plays out.

Interestingly, lumber, another massive commodity price gainer has puled back massively too. That lends some credence to the ‘commodity bubble’ narrative. For some reason, I don’t see us entering into a bona fide deflation this year. Imagine the fat to be cut in the real estate market?

Iron ore price crash deepens

The sky darkens for Australia

The Australian economy has suffered twin blows in recent weeks. Much of the country is now under extreme lockdown conditions (martial law) while the price of our most important commodity, iron ore, has pulled back significantly from around US$220/ton to US$165/ton.

State and Federal Budgets were hammered in 2020 due to the economic dislocation caused by government policies. However, just as economic activity was improving, we have reverted back to the same dislocation. This is a body blow for many Australians, particularly small business owners and those in more tenuous private sector work. While personally I’ve been one of the lucky ones, I know there are many who are not.

The economic implications of recent lockdowns will be significant, particularly with no imminent end in sight. The mental health crisis the country is suffering is escalating. Many mental health providers are overwhelmed. Anecdotally I heard a helicopter rescue pilot devastated by a spate of cliff-jumpers in locked down Sydney; including teenage girls. For some reason, these stories and very real costs of lockdowns are not really making into major media outlets. One would hope they are not pushing an agenda of lockdowns, masks and vaccinations as opposed to looking at all evidence and arguments dispassionately. The censorship around counter-arguments is concerning.

The bottom line is the miracle iron ore price has wilted, while budget pain will come again due the loss of employment/taxation revenue from small businesses. The trajectory for Australia, politically and economically, looks less than great right now.

The sky darkens for Australia

White to red hot

Australian property prices finished July 1.6% higher to be 14.9% higher than at the end of July 2020. House prices (17.7%) have outperformed units (7.1%) by a significant margin, with lifestyle preferences for more space amid WFH/lockdowns coinciding the with general shortage of detached housing relative to units.

Yet the rate of growth looks to be slowing in recent months. Even with current stimulus, increases at the rate of circa 30% per annum appear unsustainable. Now with interest rates anchored (as opposed to falling) and strong building relative to population growth (see my recent post on Housing Demand v Supply), the impetus has eased. There’s a strong psychological component driving prices at the moment, with many feeling the prospect of buying a home for under seven figures is rapidly disappearing. Could that change? Possibly. But it would likely need to come from a material shift higher in interest rates.

Most analysts’ (me included) outlook is for price growth to moderate as we approach the end of the year. That still leaves a gaping affordability gap and major pain for non-property owners at the time of fiscal/monetary stimulus in 2020. And no policymakers seem willing to tackle that problem. The social implication is increased social bifurcation and a gap between the wealthy (with multiple properties) and the rest. Younger adults without property-owning parents will struggle to attain home ownership it looks like, at least in ‘desirable’ locations or dwelling types.

Until next time.

White to red hot