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Iron ore - supply and demand rides again
Topic Started: 30 May 2014, 03:23 PM (44,290 Views)
Foxy
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Zero is coming...

http://blogs.wsj.com/moneybeat/2014/06/18/debating-value-of-vale-amid-drop-in-iron-ore-prices/
http://www.theaustralian.com.au/business/latest/fmg-offers-larger-discount-report/story-e6frg90f-1226957521237

Mate have i got a deal for you,

Peter

:o
Edited by Foxy, 20 Jun 2014, 01:13 AM.
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Lef-tee
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Mustapha Mond
19 Jun 2014, 11:31 PM
Like buying fur burgers
if you can find better, cheaper fur burgers closer to home???
The fur burger providers further from home may have to shut up shop and find a good man to marry and settle down.
The iron ore will be needed for a time.
Then the demand slows, you know the rest.

Just imagine the iron ore suppliers in Brazil.

Peter
Pure poetry from the reincarnation of Catweasel.
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Lef-tee
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Lef-tee
19 Jun 2014, 10:49 PM
The crux of my whole line of questioning is: what will the drivers of growth be once the current gigantic wave of investment spending flowing into and through the economy ends?

A few short years ago, it was pretty much consensus that anyone who thought that the economy might struggle to perform once the stimulus was withdrawn was an idiot. That consensus has now been whittled down to Adam Carr and Mike and a few others - even the Kouk has had to face reality.

Were governments of an expansionary mindset and were it obvious that there was plenty of fuel left in the private sector credit expansion fuel tank, the answer would be easy.
I guess I've never fully clarified my position.

The economy is currently suffering from a lack of spending. This is clearly demonstrated by the fact that there has been next to no employment growth over the past few years and by the fact that it has been found necessary to push the down OCR to levels that would have been considered unthinkably low not so many years ago, and leave it there. It is also demonstrated by the fact that wage growth has slowed to a crawl.

For quite some time now, each time a main spending growth driver has gone by the wayside a timely replacement has been waiting in the wings. The GFC put paid to private credit growth as an ever-increasing source but that was replaced by a large and swiftly-implemented fiscal and monetary stimulus. After a while "mission accomplished" was declared and the stimulus was withdrawn even though credit growth was no longer accelerating (and still is not). There would have been a pretty significant impact on growth then and there but lucky us - in the meantime, a second, parabolic stage of the long-running resource boom had emerged and was now pumping in vast sums of spending via investment.

But for anyone with eyes to look, the underlying weakness in the economy was there to see. It did not take long following the withdrawl of the fiscal stimulus for growth to begin floundering and the RBA was forced to completely reverse course and cut the OCR from a level that was still below what had been considered neutral all the way back down to below where it had been in the GFC and the lowest figure in half a century.

So here we are today with what on the surface looks like a very odd situation - the combination of the biggest mining investment boom in history and the lowest interest rates in half a century should be affecting the economy like a 44-gallon drum of viagra......yet it remains fairly limp. Certain interest rate-sensitive sectors are doing ok but the broader strength just isn't there.

Our version of Dutch disease has negatively impacted significant numbers of domestic businesses but at the same time, has injected vast swathes of spending into the economy, enhancing our ability to consume on two fronts - income growth reinforced by a dollar that buys more from overseas. Many manufacturers have adapted to this situation, using the high dollar to purchase pre-made parts from abroad and assemble them here. Once this goes, what then?

I submit that the economy's biggest problem is not so much Dutch disease - although that is harmful in itself - but a lack of spending growth drivers. Consumption spending is typically a net outflow rather than inflow, interest rates are approaching their ultimate limit as a borrowing stimulus and as for government - well, austerity is in vogue. Not to the same extremes we've seen in Europe but enough to stand back and hope the automatic stablizers are enough.

The external account, private borrowing, net government spending - is there another sector of the economy I'm missing here? There is not sufficient spending coming into the economy from any of them at present for strong growth and there are no current signs that this is about to change. This is why I harbour some concerns about the ending of the monster investment boom. Perhaps growth will come from an unexpected source. Perhaps government will change its stance. If those facts change I will change my mind. As I've said - hopefully I'm wrong and will need to re-examine what I thought I understood.
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newjez
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I think the govt will be forced to change its mind.

But one thing worries me about all this. It's okay to say manufacturing will suddenly start, but compounding the imported parts problem is the question of whether we have the economies of scale to sustain these industries and compete with Asia even with a lowered dollar.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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Lef-tee
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newjez
20 Jun 2014, 08:47 AM
I think the govt will be forced to change its mind.

But one thing worries me about all this. It's okay to say manufacturing will suddenly start, but compounding the imported parts problem is the question of whether we have the economies of scale to sustain these industries and compete with Asia even with a lowered dollar.
I'm not sure that we do newjez. The industrial protection that existed in the past in the name of the national interest is largely gone.

I was looking at buying a cabochoning machine the other day, which is a piece of equipment for forming gemstones that are cut to a rounded shape rather than faceted ie opals etc - it's basically almost identical to a standard bench grinder from Bunnings except that is designed to be able to handle a bit of water. It was literally 5 times the price of a piece of equipment from a hardware store - and it was only a basic model. Unfortunately, a Black and Decker (or whatever) bench grinder is not suitable because it needs to be able to handle a flow of water - as lubricant and to prevent dust - over the wheels. But apart from that, they are two identical pieces of machinery.

When I queried the supplier as to how the lapidary version could cost so much more than something exactly the same that came with a 3 year trade warranty, she told me that they are typically made in western countries - including Australia - in small factories and that they once looked at buying standard bench grinders and fitting them out to be safely able to be used for lapidary work. But the agent told them that a minimum order was 10 000 units - it simply wasn't practical to buy them. But it demonstrates the huge economies of scale of the Asian factories. That's the sort of thing we would be trying to compete against.
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doubleview
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Lef-tee
20 Jun 2014, 07:44 AM
The economy is currently suffering from a lack of spending.
Yep all the essentials(shelter, food, water electricity) have grown well above inflation resulting in every last cent of our discretionary spend being directed just to survive.

Furthermore to that...I was talking to shop owners @ Karrinyup and floreat last year just before I left WA, they said the trade would go ape shit on dole and pension days and the following couple of days.

If the gov cut just a small percent of these handouts the results could be detrimental.

Its time for the gov fiscal after burners to be turned on or this wont be pretty.

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goldbug
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So iron ore didn't shoot up overnight along with gold? So peter was right about concrete and no one wants that barbarous rustprone relic anymore.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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Lef-tee
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Quote:
 
I think the govt will be forced to change its mind.


How soon is the question though newjez - soon enough to prevent serious consequences? The attitude demonstrated below is what I'm talking about....

Quote:
 
West Australian Premier Colin Barnett has flagged further spending cuts to deliver a promised budget surplus if the iron ore price does not recover.

The price of iron ore has slid below the benchmark level of $US90 a tonne for the first time since September 2012 as demand from China drops.

It is now down 34 per cent for the year.

Treasury has forecast an average price for the coming financial year of $US111.

Mr Barnett said while he expected the iron ore price to rebound somewhat, the government was committed to delivering a surplus regardless.

“We have budgeted for a surplus and if it’s necessary to make further cuts in expenditure to achieve that, we will do it,” he said.

Link here

Our policy makers are members of a social elite who are largely immune to the effects of their own bad decisions. The ideological drive for budget surpluses is so strong in places like Europe that they have shown they are prepared to destroy the jobs and lives of millions and crush economic growth in pursuit of budget surpluses, ironically pushing themselves further away from that goal as they try harder to achieve it via a scorched earth policy.
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Poontang
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Lef-tee
20 Jun 2014, 07:44 AM


The economy is currently suffering from a lack of spending.
http://www.theage.com.au/business/storm-clouds-gather-over-retailers-20140619-3ah05.html

People are spending but it is coming at reduced margins for retailers. Cheap finance deals for cars 0%, 1%, 1.5%, 2.9%
finance deals to get people to part with their hard earned.


Quote:
 
It plays into the findings of the latest edition of debt collector Prushka's ''canary in the coalmine'' briefing paper, which found that many consumers were unable to pay off debts due to the increased cost of living and household bills.




Quote:
 
''The 'stimulus' from the government or Reserve Bank has disappeared and retailers will need to rely on wages growth or lower savings (higher house prices) to boost retail sales,'' the report said.



Then you have retailers saying we need to abolish reduce peanlty rates, they are a burden and making it hard for us to survive...

Yet the article points out if there are no decent/reasonable pay rises these current retail conditions are likely to continue for sometime. Some retailers will not survive this.


As for Peter Frasers comment that a falling dollar will be a benefit as it will encourage more (new) local production. The businesess that have gone won't come back.
Edited by Poontang, 20 Jun 2014, 01:05 PM.
There are some people who seem angry and continuously look for conflict.
Walk away, the battle they are fighting isn't with you, it's with themselves.

The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it.
The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.

Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
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Foxy
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Zero is coming...

When the best grade ore is cheap what do you do with the low grade ore??

I know high grade.
the mine.

What comes next after high grading??

Mr. Pigiron you would know that.

Peter

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