Sudden collapse of iron ore price casts shadow on Australian economic prospect

Sudden collapse of iron ore price casts shadow on Australian economic prospect

 

by Jeremy Zhao

CANBERRA, March 15 (Xinhua) — The Australian Bureau of Statistics (ABS) on Thursday posted the biggest monthly full-time payroll surge since 1991. Although the jobless rate held still at 6 percent, the number of full-time jobs increased by 80,500 across the country in February. This is surprisingly good data, showing that the economy is recovering and the central bank’s low interest policy has worked.

However, the sudden plunge of iron ore and copper prices cast a shadow on the Australian economic outlook. There are concerns that the slowdown in Australia’s biggest trading partner, China, will eventually hurt Aussie economy, especially the mining sector.

On Thursday, China released economic data of fixed-asset investment and industrial output of first two months of 2014. Both figures missed targets with fixed-asset investment growth at 17.9 percent and industrial output growth at five-year low, 8.6 percent.

The commodities market has already anticipated the weak economic data from China. Both iron ore and copper suffered sudden price crash in the past week. In north China, the price of iron ore has already fallen from 135 U.S. dollars a ton at the beginning of the year to 105 U.S. dollars now, almost 20 percent off.

Many explanations have been brought out for the iron ore price drop — unexpected Chinese trade deficit in February, record stockpiles of iron ore in Chinese major ports, government’s decision of tightening credit for underperforming steel mills.

Also China is determined to fight against air pollution, particularly around capital city of Beijing, by means of cutting steel production capacity in Hebei province which accounts for a quarter of total steel production in China.

Price fall and shrinking demands from China will surely put more pressure on the mining companies.

“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,” said Tom Price, UBS commodity analyst.

But the iron ore bosses are not as worried as the analysts. On the contrary, they are undeterred with the long-term prospect of the commodity.

“There will be short-term volatility, proof of which you are seeing this week. The longer term is still intact and I can’t see any indication that would change my mind, we still see good growth in the market through to the 2020s,” Rio Tinto’s head of iron ore, Andrew Harding, said at the AJM annual global iron ore and steel forecast conference in Perth.

This view is shared by BHP Billiton head of iron ore, Jimmy Wilson, who said at the same conference that “our view that Chinese crude steel production is expected to peak at 1.1 billion tons, around 2025, is unchanged”.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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