Why is the Iron Ore Price falling?

The Wall Street Journal has an excellent piece on developments in the iron-ore market – the commodity which has seen a price drop of 40 percent in 2014. Iron ore, remember, is Australia’s main export product. As regular readers know, I have been following the this market due to my bearish stance on China and Australia for the past three years.

The slowing Chinese economy  is seen as the main culprit for the massive drop in the spot price of iron ore (and other commodities). To quote:

Looming over iron ore, and all other commodity markets, is China’s economic slowdown, which has sent prices to multiyear lows for everything from silver to coal.

So far, I mainly agreed thinking that oversupply will become an issue only in the second half of 2014. Turns out I was wrong, as you can see in the chart below:

WSJ_Iron_Ore

Incredibly, neither iron-ore imports nor China’s steel output have slowed down so far, but the price is already down by 40 percent! Now, that’s what I call a supply glut. Quote:

The volume of additional supplies being pumped into the seaborne market, largely from new and expanded mines in Australia’s remote northwest, is declining, but analysts say it may take some time for an oversupply in the market to be absorbed. Shipments through Port Hedland, the world’s biggest iron-ore export facility, were up 36% in August compared with last year, the local port authority said.

The increased volume has more or less counterbalanced the price drop, with the effect of keeping Australia’s export earnings up and its current account within acceptable bounds (around -3 percent of gdp). Can you imagine what will happen to iron ore prices and to the Australian economy once China comes to its senses? Nothing has happened yet…

Disclosure (short AUD and CNY)

 

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