We have consistently argued that, in an oversupplied iron ore market, low prices would be required to force the closure of marginal production both in China and overseas. Although sooner than anticipated, our expectations of lower prices have materialized, with the spot price down 38% ytd to US$84/t. The price decline has been dramatic, but a weak demand outlook in China and the structural nature of the surplus make a recovery unlikely. In our view, iron ore has already transitioned to an exploitation phase where the commodity prices are typically subject to the deflationary pressure of mining productivity and the depreciation of commodity currencies. We maintain our US$80/t forecast for 2015 and we apply our updated assumptions on cost deflation by lowering our 2016-17 forecasts to US$79/78/t (down 4%, 8% respectively).
When the irrational is rational: why prices undershoot
Prices in the year to date have underperformed relative to the consensus expectations of a soft landing. In our view, this illustrates the shortcomings of global cost curves as a tool to forecast iron ore prices. The lack of adequate data on Chinese supply is a well-known challenge, particularly now that NBS statistics on production volumes send confusing signals; on balance, we believe that Chinese supply on the upside on the back of ongoing expansions that will partly offset the loss of marginal mines. Moreover, prices tend to undershoot in oversupplied markets because marginal producers have a strong financial incentive to delay mine closures even when they operate at a loss. Far from being an irrational decision, we argue that this behavior simply reflects the costs associated with idling an asset and the associated loss of option value.
Chinese mines and stockyards not enough to balance market
As the market falls deeper into surplus, excess iron ore can only be absorbed via an increase in inventory and/or the displacement of marginal production. Since the start of the year, stockpiles at Chinese ports have seen a 23Mt increase, while low prices have forced the closure of c.48Mt in grade-adjusted Chinese and seaborne production capacity. Each of these safety valves will be tested further, in our view, but stockyard space is finite and port restocking should play a more modest role from 2015 onwards. We believe this will leave Tier 2 seaborne producers increasingly vulnerable, with up to 40Mtpa in seaborne capacity at risk of closure in both 2015 and 2016.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy