The Pascometer, having become aware of a general unease surrounding the price of iron ore, strides into the main street, chaps flapping in the breeze, and calls out the one place in the Australian economic and business commentariat where anybody can actually find any reliable advice about what is happening with iron all at all, both holsters unfastened, hands poised... ‘ah’m a callin’ you out ya scaremongerin’ varmit, and runnin’ you outta town!’
It takes two graphs to put the current mini-panic over the iron ore price into perspective, to realise that Australian miners should eventually do quite nicely out of the present shakeout.
He has two weapons – fear and surprise!
That’s with the obvious caveat that first they have to survive the rationalisation. Some won’t. That’s unfortunate for the marginal mines’ owners and employees, but it’s hardly surprising that the highest-cost producers fail when prices come off the boil. It’s as normal in mining as drought is in farming. And from the overall Australian economic viewpoint, it doesn’t matter.
…there will need to be sacrifices, but great and glorious future will be the national future after those high cost miners are floated off on the accompaniment of gotterdammerung
It’s the nature of news to favour the biggest number, the scariest percentage, the sharpest comparison. (There are whole blogs devoted to frightening punters into reading.)
It is also the nature of little kids to note that Emperors (or the Australian mainstream media, or even the Pascometer) sometimes wear no clothes, and to find what is thus revealed somewhat entertaining……
Thus you will have seen plenty of mentions about how far the iron ore benchmark has fallen so far this year or, even more dramatically, since its peak four years ago.
Australia’s four largest exports according to the RBA are iron ore, coal, gas and gold. Many of the mentions of falling iron ore prices have come in the context of the national economy having adopted the ex-cliff position (Wile E Coyote) vis all of these, as an entire national business media commentariat has warbled on about something else, generally house prices. Many of the mentions surrounding iron ore have come in the context of wonderment about what, apart from the four largest national exports, may be conducive to house prices, a national financial system, and a national psyche continuing to function as they have done in the past of living memory, and some contemplation of other ways in which these may function ………
A quick glance at the accompanying 20-year graph shows why no-one bothers to talk about how it compares with anything much before that. Iron ore is back where it was five years ago, but remains sharply higher than any point prior to that.
there may not even be any need to look at the chart for readers of MB, seeing as they would have seen that exact same chart, stretching back to the years when a tonne of iron ore cost less than a slab of Vic tins, on a weekly or monthly basis at MB going back for a number of years and would know what it looks like by memory………
Prices soaring over the past decade have had the inevitable result of spurring a sharp increase in supply, which inevitably reduces prices. Like every boom that ever was in any commodity, the animal spirits tend to get a bit carried away on the upside and some projects that shouldn’t have started come to an end.
a little bit of economic lettuce leaf over the Pascometer’s credibility nads. Absolutely nothing in there that any reader of MB hasn’t seen on an almost daily basis, indeed the question arises as to why an entire national business media commentariat hasn’t been noting that exact same phenomena far more than it has (nor mention of why national economic policy would be crafted around those upside animal spirits at the expense of our tradables sector)………
The prime fundamental of increasing steel consumption as developing countries develop remains in place. China’s steel intensity has a long way to run yet, never mind the billions of people yet to get to China’s stage.
The business journalist’s equivalent of a slow half volley outside off. The prime fundamental is that the major current steel consuming developing nation – having been on the receiving end of market efficiency in the guise of BHP and RIO taking them for an iron ore bath each contract negotiation, is now at a stage in its development where it may have need for less iron ore than had been anticipated and has other suppliers coming on tap. Note the way the Pascometer opens up talking about ‘developing countries’ (some of which have their own iron ore) but then slips in China afterwards. And there are billions, absolutely billions, trying to get to China’s stage – a shame most of those billions don’t have the funding or national economic development plan to start buying now, or have the stuff lying on the ground in their own nations. As a nation we want the Chinese buying first and foremost, and buying right now ………
There is a bigger fundamental commodities story about the nature of global growth at present, about it being dominated by emerging nations for many years to come, about commodities prices being artificially low over the previous couple of decades. That was summarised in a HSBC economic report yesterday that preposes current commodity prices are only getting back closer to their long-term average.
Given that Bloxo has pioneered the use of psychotropics as a market analysis tool, should we not forgive the Pascometer for a quick toke on the spliff? Once the sounds and lights flickering at the edge of consciousness while a little girl calls for mummy outside the window have started to subside, should we as a nation wonder if there are flaws in the national economic narrative (cheered on by the Pascometer) or if the large number of home delivery food packings strewn about the national economic floor have been chalked up on anyone in particular’s credit card? ………
The relatively good news right now though is in the accompanying graph lifted from a section of last month’s Reserve Bank statement on monetary policy devoted to the iron ore and coal cost curves. The red bits represent the production costs of various Chinese iron ore mines, the pumpkin/beige bits (no, I have no idea why the RBA selected pumpkin as the national colour – they’re economists) represents Australian mines, blue is Brazil and the rats and mice are whatever the other colour is.
The old someone else’s problem is much bigger than ours trick. Plus an easy slapping for some colour determining nonentities at the RBA ……… No mention of the possibility that Australia has wagered the housing payments on its particular horse in this race, and that if it doesn’t run a place someone may get a cold dinner
It shows that the vast majority mines with production costs above $US80 a tonne are in China. A lot of those red pixels on your screen turn into red ink at current prices. Most Australian iron ore production is nicely below the top quartile of expensive miners.
The Pascometer sees inefficient production in China. He think s they may be losing money at current prices. Does he wonder if the boys in Beijing may think they could get a better price of they could share some losses with Australian producers? ………
Thus, if the iron ore market is rational, it’s mainly those expensive Chinese mines that should fold first, taking out a couple of hundred million tonnes of production, which should allow prices to firm up a little.
Pascometer channels Rudyard – if your aunty had something she could be your uncle. Thus, if the lump in his speedos is a chunk of salami, there may be some embarrassment if he is asked to drop his strides. Would the boys in Beijing think they could get a better price if something firm was waved in front of (or even behind) Australian iron ore. Particularly those maybe laden by heavy debts. Would they show enthusiasm for the task at hand? ………
Blow the froth off the top of the production bubble (if that’s not confusing metaphors), and most Australian mines should do nicely enough.
Pascometer should not mix alcohol with his psychotropics of choice………
The catch here is just how rational the market might be. The former head of BHP Billiton’s aluminium and nickel operations, Alberto Calderon, has been scaring local miners by reportedly claiming China’s high-cost producers will survive the low prices. Perhaps scarred by his aluminium experience at the hands of Chinese producers flooding that market, Calderon believes China will open new mines and not trim overall production much at all.
Someone hitherto in charge of iron ore production has asked about that lump in the Pascometer’s speedos ………
There is another factor here though – the quality of much Chinese iron ore. It’s not up to Australian and Brazilian standards and therefore is dirtier to use in a country that is starting to take pollution seriously. And Chinese economic policy continues to evolve – for all the conflicts of provincial governments, Beijing is steadily less interested in propping up expensive dirty operators.
Pascometer says it is not how much it costs but how you use it, casts himself as Beijing analyst. Doesn’t ask if the boys in Beijing would gulp down some dirty air for a while to hold an Australian iron ore producer over the railings while waving that something firm about………
Meanwhile, even as the price cycle rolls along, the macro impact on Australia hasn’t been as shocking as some commentary might have you believe.
As a quarter of our national revenues a slump in iron ore prices, following on from the slump in coal, the likely absence of a gas boom, and the continued wonderment about gold prices, is actually good for us. Those ToT or current account impacts will liven us up. The real wage growth flowing on from selling out tradables to go long iron ore will be almost orgasmic ………
Yes, iron ore is our biggest single export and its price is down this year by a third or so – which, on the surface, might mean we’re going to suffer a sharp fall in export income.
Note the use of might in the context of it being 100% certainty. Let us ask the Pascometer if he would like a third less sslary for this performance?………
But the price fall has been almost matched by the increase in production, meaning there’s not much difference in total export revenue. How long that stays the case depends on how long it takes this cycle to roll through.
Someone needs to explain stocks and flows and ToT to the Pascometer. And those total export revenues are largely being acccrued by companies circa 80% owned from somewhere other than Australia, paying sweet FA for the national resources they dig up and ship off, and employing as few Australians as they can credibly get away with………
Then there’s the great unknown of exchange rates. If at some stage the Aussie dollar does what it’s supposed to do when commodity prices soften … but forecasting the Aussie is indeed a mug’s game.
The Pascometer cant bring himself to say the AUD should be somewhere well south of where it is, doesn’t wonder about what happens to the national economy if it remains anywhere near where it is, and then asks if he can go somewhere else………
By way of uncomfortable contrast though, the RBA graphs for coking and thermal coal aren’t nearly as nice – the Australian pumpkin is well represented at the expensive end of production costs.
The Pascometer takes another swing at the unknown RBA graphic production unit, while seemingly acknowledging that two other components of Australia’s national quadrella may not run a place. Perhaps unwisely he starts mentioning vegetable matter in his piece (which could provide ideas for those looking for something to toss)………
Australian mines of all colours are sharply reducing their costs. In some cases, the cost cutting is nothing short of spectacular, so the RBA data may be a little out of date.
There is nowhere to go so another toke and enjoy the colours. Suggests the RBA may be out of date (as opposed to in a parallel universe where utter bilge passes for business commentary) ………
Nonetheless, it would be a brave soul who believed the coal industry wasn’t facing considerably more pain than the iron ore miners.
Concludes by pointing at the speedos worn by the coal industry.………
There must be a certain group of people who stand around when fire alarms go off in a shopping centre muttering that it's just gloomers and doomers having a drill, and that you have to accept a few risks in life you will never get the shopping done.
It happens in my office. The alarm goes off and people just look around trying to gauge what other people are doing. Me, I grab my coat and head to the nearest door. It may be a drill, but at least I have my coat as it may be cold outside. The other poor suckers didn't have a chance to grab their coats and they are shivering.
And then some poor smuck called skamy comes tearing out of the building in a ball of flames...
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
There must be a certain group of people who stand around when fire alarms go off in a shopping centre muttering that it's just gloomers and doomers having a drill, and that you have to accept a few risks in life you will never get the shopping done.
It happens in my office. The alarm goes off and people just look around trying to gauge what other people are doing. Me, I grab my coat and head to the nearest door. It may be a drill, but at least I have my coat as it may be cold outside. The other poor suckers didn't have a chance to grab their coats and they are shivering.
And then some poor smuck called skamy comes tearing out of the building in a ball of flames...
After the alarm has been going off non stop for 13 years with no fire spotted, can you blame us for not panicking anymore?
There must be a certain group of people who stand around when fire alarms go off in a shopping centre muttering that it's just gloomers and doomers having a drill, and that you have to accept a few risks in life you will never get the shopping done.
It happens in my office. The alarm goes off and people just look around trying to gauge what other people are doing. Me, I grab my coat and head to the nearest door. It may be a drill, but at least I have my coat as it may be cold outside. The other poor suckers didn't have a chance to grab their coats and they are shivering.
And then some poor smuck called skamy comes tearing out of the building in a ball of flames...
great analogy - i take it pascoe is in the former group
There must be a certain group of people who stand around when fire alarms go off in a shopping centre muttering that it's just gloomers and doomers having a drill, and that you have to accept a few risks in life you will never get the shopping done.
It happens in my office. The alarm goes off and people just look around trying to gauge what other people are doing. Me, I grab my coat and head to the nearest door. It may be a drill, but at least I have my coat as it may be cold outside. The other poor suckers didn't have a chance to grab their coats and they are shivering.
Why not leap out the window, you're only 14 floors up? You will be out of danger much faster.
Any expressed market opinion is my own and is not to be taken as financial advice
Perhaps if the alarm was a bit more balanced and realistic it would be listened to.
It's worst than this. Fire alarms are based on science. It's more like a man wearing a sandwich board furiously ringing a bell and ranting at the top of his lungs because he saw a fish jump extra high in the river today. He does this for 13 years every day, giving a new crazy reason each day.
And the bears are the guys listening to the raving lunatic, nodding their heads like those stupid dogs people put in the back seat of their cars
Perhaps if the alarm was a bit more balanced and realistic it would be listened to.
There is an arsonist about, there's been fires everywhere. Just because you haven't had one here yet, is no reason not to listen out for the alarm bells.
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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