The RBA thinks the top might be in for iron ore

INNER MONGOLIA, CHINA – NOVEMBER 03: A Chinese labourer works next to the furnace at an unauthorized steel factory on November 3, 2016 in Inner Mongolia, China. (Photo by Kevin Frayer/Getty Images)

The RBA board thinks thinks global prices for Australia’s biggest export, iron ore, may be at their peak.

In the minutes from its September policy meeting, the bank outlined a detailed conversation between board members on iron ore prices.

Here’s what the minutes say (emphasis added):

Members discussed the influence of China on the global iron ore and steel markets more generally. They noted that China was by far the largest consumer and importer of iron ore globally. This reflected the fact that China, with the world’s largest population, had reached a similar level of steel production per capita to that of industrialised economies. Iron ore prices had been supported at higher levels because of sustained strong demand for steel in China. However, prices were expected to fall in the period ahead because of the ongoing expansion of global iron ore supply following an extended period of strong investment. Members also noted that Chinese steel production per capita was likely to be close to its peak and that growth in Chinese steel production would not add much to global demand for iron ore in the future. Members observed that, in the longer run, there was potential for India to have a noticeable effect on commodity markets as investment in residential construction and transport infrastructure increased.

Iron ore has been on a bit of a tear this year, although the market has been choppy. Spot prices for the benchmark 62% fines fixed yesterday US$71.37 a tonne. Here’s the chart of the action this year:

Strong commodity prices have been a contributing factor to the recent strength of the Australian dollar, which is currently trading around US80c. (US dollar weakness has been the main driver, but strong commodity prices have also been supportive.) With the RBA noting a continuing appreciation in the currency will drag on growth, the view that the influence of strong commodity prices is likely to fade would be a bit of a source of comfort for the central bank.

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