Iron ore watchers focus on China

The iron ore price is under close scrutiny as a proxy for the financial health of Western Australia and, ultimately, the nation.

At the time of writing, the commodity’s spot price had slipped to just a little over $US100 per tonne, half its highs during the early days of the pandemic and, more concerningly, a 25 per cent drop since January.

Despite this, the value of iron ore is still historically high, sitting well above values considered the longer-term norm around $US70-80/tonne, depending on whose view it is.

And it’s worth remembering this price is in US dollars while the Australian dollar into which it is converted is sagging in valuation to around US65 cents.

Contextually, the previous boom in the price of iron ore prior to the GFC occurred when our dollar was much closer in value to the US currency, and for quite some time was worth more.

So the prices, even accounting for inflation over the past 10-15 years, are greater now in local terms than they were when the first mining boom of this century reached its crescendo.

It is also worth noting that the price has been lower twice in the past two years, so this is not new territory.

However, what is new is the lack of confidence pervading the market since late last year when the reality of lacklustre electric vehicle sales hit lithium and related stocks.

Of course, iron ore, and its end use as steel are not as niche as lithium.

Demand for the globe’s primary construction material differs from the specifics of EVs and related conjecture about progress on the transition to electrification.

Nevertheless, there are reasons why the market is wary and confidence may be waning.

We are reliant on China’s economy and there are definitely hiccups there that may affect demand.

The collapse of building companies is a major signal that the growth engine of Asia has hit some turbulence, even if the opaque nature of China’s economic reporting is such that we don’t have a full grasp on what is happening and what is being done to correct it.

The advantage of a state-run economy overseen by a one-party system is that it can react to economic troubles in ways democracies cannot. It is quite plausible the Chinese government will simply redirect efforts from housing and apartment construction into other areas.

But even one-party states have politics to deal with and even their best technocrats can make mistakes. So, nothing is guaranteed.

Another concern is where China might spend. It has already invested monumentally in modernising its military and may accelerate development of warships, other major equipment, defence infrastructure and munitions to achieve the twin aims of stimulating the economy and further enhancing its regional power.

Buying WA iron ore to do so might benefit us in the short term, but the arms race in the region is already costing Australia in terms of its own military spend, so we ought to be careful what we wish for.

It is fascinating to recall that, in the late 1930s, the conservative government of the time banned iron ore exports to Japan and had a showdown with unions over shipments of scrap iron and semi-processed pig iron to the Japanese.

The politics around that was ostensibly Japan’s military build up and invasion of China, although the wharfies at the time were very influenced by communism and may well have been acting at the behest of those who did not want the Soviet Union’s power in the Pacific threatened.

Whatever the case, it turned out to be prescient. Our exports were undoubtedly used to make military equipment that ultimately cost Australian lives and put our nation’s sovereignty at risk.

Another longer-term issue is Australia’s role as the primary supplier of China’s iron ore.

China has political reasons to invest in other sources of iron ore and, while alternative supplies may be years away, that is something to be conscious of.

A more competitive iron ore market could mean Australian ore is one day snubbed by China in the same way barley, wine, lobster and coal have been recently.

That may not be affecting the price right now, but it is something to consider in terms of economic confidence as we look ahead to the next decade.