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

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