Don’t catch a falling knife.
That’s the phrase traders use when a a commodity, currency, stock or other asset is falling sharply. It’s good advice. But, unfortunately it also means any buyers inclined to support the price step away from the market, which then falls faster and harder than before.
This is what’s happening in the iron ore market at the moment.
After another wave of high volume selling on China’s Dalian Mercantile Exchange yesterday and again overnight, the entire Nymex iron ore curve is now under $50 a tonne. Our favoured contract to watch on Nymex, the June 62% Fe Cfr China, fell $2.37 to $47.28.
Joe Hockey’s budget is already facing headwinds. One report today suggests the price fall could strip a further $3 billion a year out of the budget bottom line.
The big question for Australia’s junior iron ore miners is where prices will settle. Already BC Iron has received a royalty break from the Western Australian government and other miners are likely to be worried.
Earlier this week Westpac Senior economist Justin Smirk suggested the price could fall below $40 if the big miners want to drive it there. He said:
BHP and Rio Tinto can deliver into the Chinese market for around $US40 per tonne and have an objective to drive costs even lower.
The further the price falls the closer we get to the bottom. But for the moment where that is is not clear.