Iron ore is the cornerstone of Australia’s export mix, accounting for around one-fifth of everything we sell to other countries around the world.
The iron ore market has been on a wild ride lately, with prices starting a stunning rally last year but crashing even faster in recent weeks, from highs above $US90 to around $US66 this week.
There is a new edginess to iron ore spot and futures markets. Once almost entirely driven by the growth of China’s economy, the markets have increasingly been driven by speculative activity.
Goldman Sachs believes the recent fall in spot prices heralds a new period of weakness for the commodity. This week it cut its rating on BHP shares to sell on a bearish outlook for iron ore, saying that “over the short term we believe the trajectory of commodity prices which will drive share prices and valuations, not fundamentals.”
But further out there are some concerning forecasts for the future of the global iron ore market, in which Australia has enjoyed a dominant position through China’s vast industrial expansion over the past two decades.
This chart shows forecast iron ore supply from various countries and regions over the coming years:
That is a huge increase in production, with Brazil and West African output ramping up, and shows Australia has a fight on its hands.
Australian producers like BHP, Fortescue and Rio do have some advantages here: production costs are low thanks to the huge investments during the boom, and Australia’s particularly high-grade ore is necessary for certain steelmaking processes.
But it shows that as with many other export categories like education and professional and financial services, it’s a globally competitive world and the old reliables that have served a country well can rapidly come under pressure if other nations lift their game.