Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Monday, 28 April 2014

What's happening with iron ore?

Data

Next week is an absolute corker for data: retail trade, labour force, building approvals and more.

This week, however, is set to be a much slower affair, so I thought I'd take a quick squiz at what's happening to Australia's most valuable export commodity, iron ore, and what that might mean for the economy.

Fe...

Up to half of Western Australia's resources by value can be accounted for by iron ore, and nearly all of the iron ore which we dig up and export is shipped out from Western Australia, in particular from the Pilbara region.

More than nine-tenths of Australia's iron ore is located in the state WA, and about four-fifths of that is in the Hammerlsey Province in the north-western corner of the state.

The big companies producing up there include Fortescue Metals Group (FMG), BHP Billiton (BHP) and Rio Tinto (RIO), between them churning out tens of millions of tonnes or the commodity annually.

It's a spectacular sight (and site) if you ever get the chance to visit, particularly since all of Australia's iron ore projects are open cut rather than underground operations. 

The Dampier Salt ops are also an amazing sight to behold.

Of course, most of the iron ore is destined for China to fuel its constuction boom, with Japan, South Korea and Taiwan each taking a smaller share, with nearly all of it being used to make iron in the form of steel.

Price

Between 2007 and 2011, iron ore prices went on a spectacular run, first doubling and then doubling again as demand for the commodity soared, with prices heading to a wildly exuberant $190 US$/tonne (click chart).


To put this in some kind of perspective, Fortescue is aiming to have lowered its production costs from above $80/tonne to around $73/tonne by next year.

Since 2011, with a supply deluge hitting the market and China's economy perhaps running a little less hot than previously, spot iron ore prices have come back into some kind of reality, and today the spot price sits a little above $110 US$/tonne. 

A number of investment banks and forecasters expect that the spot price will fall further in the coming years, thus damaging Australia's terms of trade.

US$ prices

Australia is highly leveraged to its iron ore export trade, especially to the ongoing level of demand from China, which is why developments in both the price and demand are scrutinised so closely by the financial and business media.

Note, however, that since iron ore contracts are denominated in US dollars, to some extent adverse fortunes in the spot price might be offset by corresponding movements in the Australian dollar.

To put that in plainer English: if the iron ore price collapses, the Aussie dollar will likely follow suit, and the export price in US dollar terms will be less impacted that would otherwise be the case.

I'm not even sure that's plainer English, but hopefully it makes a bit of sense.

A bountiful surge in Australian exports

As for export volumes, well, Australia certainly seems to have little to worry about on that front.

The Reserve Bank's John Edwards said that Australia was benefiting from a "bountiful surge" in exports.

And looking at the data, which is shattering export volume records by the month, it's hard to disagree.

The Reserve Bank's chart packs are more than a month out of date now

When the next chart pack is released in the next week, the y axis will  most likely have been adjusted because the latest export data out of the Pilbara implies that we are heading right off them charts...

Bulk Commodity Exports graph

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For this week's $11 movie at Broadway I watched Divergence. Was alright I guess, but felt like it was about 100 hours long. 

4/10.