Iron ore rebounds to almost $US200 a tonne as Australia’s market dominance continues

China’s plan that could wipe billions from the Aussie economy has hit a snag this morning, as an incredible stat highlights Australia’s powerful position.

China’s plans to drive down the price of Australia’s biggest export have taken a hit with experts saying doomsday predictions of a “sustained downtrend” in the price of iron ore is “unlikely”.

The price of the valuable steelmaking commodity had slumped this month after hitting a record high of more than $US230 a tonne last month.

China — which buys 60 per cent of Australia’s iron ore — reacted by making moves to crack down on the soaring price.

Beijing says the skyrocketing ore prices are putting China’s economic recovery from the pandemic at risk, with companies and everyday Chinese citizens bearing the cost.

Last month, its National Development and Reform Commission (NDRC), along with four other departments, vowed to severely punish “excessive speculation, price gouging and other violations” that they say helped lift prices.

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Iron ore prices have dropped since hitting a record high last month.

Regulators would adopt a “zero tolerance” approach toward illegal activities and strengthen regulation of abnormal transactions and malicious speculation, the NDRC said in a statement.

China, via its state media, said it had the potential to wipe $32 billion from the Australian economy by driving down the cost of iron ore, and early signs in the past few weeks show its strategy could be working.

The price of iron ore slumped 11 per cent in the days that followed the NDRC’s meeting a fortnight ago — with some analysts predicting the downward trend.

Capital Economics’ latest report predicted iron ore prices could drop back to around $US140 per tonne by end-2021, and $US120 per tonne by end-2022.

And, NAB head of commodity research Lachlan Shaw suggested that “iron ore may not trade above $US200 ($A258) again”.

However, this morning CommSec has revealed a sharp rise of 5.9 per cent in the price of iron ore — meaning it now sits just below $US200 at US$198.75 a tonne.

This bounce back has seen gains for major mining companies on the market today.

Iron ore prices have rallied in the latest session, up $11.10 or 5.9% to US$198.75 a tonne. (CFR Tianjin port). #ironore#ausbiz

— CommSec (@CommSec) May 31, 2021

Gains from miners $FMG, $BHP & $RIO are adding ~12pts to the #ASX200. Not including the gains, the market would be down ~0.4% (rather than 0.2%). https://t.co/imErncH0O7

— CommSec (@CommSec) June 1, 2021

Benchmark iron ore on the Dalian Commodity Exchange for September also surged 45.3 per cent to 1106 Chinese Yuan ($224.22) per tonne. Ausbiz anchor David Scutt pointed out it was below 1000 Yuan ($202.78) only four days ago.

Dalian iron ore was below ¥1,000 only four days ago..... #boingpic.twitter.com/cuEaj4nw2C

— David Scutt (@Scutty) May 31, 2021

These are only one-day results, so they shouldn’t be read into too much, but experts say it’s clear the demand for iron ore and steel is not going away.

In a note this morning, OCBC Bank provided an incredible statistic that shows just how strong Australia’s position is in the iron ore market, meaning China will not be able to turn its back on Aussie mines any time soon.

“We estimate that Australia probably shipped about 72 million tonnes of iron ore in May, while Brazil exported about 26 million tonnes. This is consistent with prior months and suggests actual physical demand for the ferrous metal remains intact,” they said.

“We remain of the opinion that China’s recent efforts are really to clamp down on excessive speculation and not actual demand itself. Prices may have come off in weeding away speculation, but a sustained downtrend in iron ore and steel prices are unlikely to be forthcoming.”

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However, in a more sobering outlook for Australia MB Fund and MB Super Chief Strategist David Llewellyn-Smith said it was only a matter of time before China cuts off Australia’s iron ore.

“Whether China cuts off Australian iron ore is not in question,” he wrote in MacroBusiness.

“Only the timing of it is. As well as what it will do to the Australian economy when it does.”

As “unimaginable quantities of Aussie iron ore flood ex-China markets”, global iron ore prices will collapse, writes Llewellyn-Davis.

“China absorbs more than a billion tonnes of seaborne iron ore. Australia ships around 700mt there every year. Some large slice of this will be progressively dumped on other markets,” he added.

The bigger hit, however, will be to national income – Australia will reap at least $150 billion this year in export revenue from iron ore, “nearly all” of which will “be wiped out by the combination of volume and price pressure”.

While the hit to our total exports will be big, he advises it will remain manageable, likely returning to 2015 external conditions.

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China is buying up Australian iron ore like never before to create steel for its massive infrastructure projects. Picture: Vincent Du/Reuters

“That also gives us a very good guide to what will happen: Nominal growth will be crunched; Inflation and wages will be hit for years; The budget will be a sea of red; Mining stocks will fall; Bonds yields will plunge; AUD will crash,” Llewellyn-Davis warned.

On top of that, Australian house prices “would tumble”, “radically devaluing versus the world via the collapsing currency”.

“How long that would last is the more interesting question. Presuming that AUD can keep on falling without creating inflation then there is no obvious immediate limit to it,” he said.

– with Natalie Brown