Over the past month and a half, iron ore prices have recovered slightly after falling to nearly US$47 per tonne. But the rally may be short lived. The steelmaking commodity has experienced its sharpest decline in weeks as Canberra continues to consider inquiries into the operations of BHP Billiton (ASX:BHP) and Rio Tinto (ASX:RIO). The drop in prices also coincided with a steep drop in Chinese steel prices, which have fallen to 12-year lows.
Although China is still increasing its iron ore purchases from Australia, its total demand is falling sharply. As China’s economy grew rapidly, so too did its demand for iron ore. But now that the world’s largest importer of iron ore is suffering from economic setbacks, prices for the commodity have plummeted along side its demand. Moreover, Brazilian mining giant Vale has just signed four new deals with Chinese businesses to directly supply the country with the important commodity. The Rio de Janeiro-based company not only signed exclusive trade agreements with Chinese companies, it also received a credit agreement totalling US$4bn from Chinese banking giant Industrial and Commercial Bank of China.
The spat over iron ore oversupply cooled off after the commodity recovered slightly. But the debate was reignited, especially after the Commonwealth Budget showed that falling iron ore prices were digging into the government’s receipts. Fortescue Metals Group (ASX:FMG) came under fire after data showed that it had not reduced iron ore production, whereas BHP and Rio had. Previously, Fortsecue had accused BHP and Rio of oversupply. As the debate over production levels continue, Australian politicians join the debate and threats of a potential inquiry as shaking investors confidence in the industry.
Author: Simon Herrmann
May 20, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.