Iron ore price slump surprises analysts, should worry Government
The World Today By business reporter Pat McGrath
Updated Wed 12 Mar 2014, 3:01pm AEDT
This week's massive fall in iron ore prices is not only hurting miners, but also Australia's budget.
This week's big drop in the iron ore price has come a surprise to many commodity market watchers, including UBS analyst Tom Price.
"Started off the year at about $US135 a tonne landed somewhere in north China and it's come off about 20 per cent to a low of $104, $105 a tonne landed in north China," he observed.
"This is a genuine surprise to the market because generally this time of year you'd actually see trade flows lift and the price lift as we come out of winter and the Chinese New Year period."
There are a number of explanations for the price drop - an unexpected Chinese trade deficit exposing an oversupply of iron ore, as well as the Chinese government's announcement yesterday that it is tightening credit for underperforming steel mills.
"There's a third issue too - the government is concerned about levels of pollution, particularly around Beijing, and so they're actually cutting steel production capacity and all of the raw materials processing capacity that's going into the industry and that's hurting the iron ore trade," added Mr Price.
The long term outcome was always going to be a booming commodity demand, a booming commodity supply and rather more sensible pricing.
Chris Richardson, Deloitte Access Economics
Thus economic policy changes aimed at clearing the skies over China could send dark clouds over Australia's mining sector.
"Rio Tinto, BHP and Fortescue, the three big producers here in Australia, have invested an enormous amount of time and money in expanding their production capacity over the last few years and they're just starting to deliver the biggest lift in those programs last year and this year, so they'd be a little bit troubled by this," Mr Price said.
Iron ore specialist Fortescue has bounced back a bit on the share market today after two days of large falls.
Rio Tinto and BHP Billiton are still trading lower after being sold down heavily earlier in the week.
