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.

Tuesday, 9 December 2014

Iron Ore Carnage Continues

Iron Ore Declines Again

Iron ore is back below $70/tonne this morning with the spot price seeing a "69 handle".

Not pretty!

Didn't get around to blogging it but it was interesting to note that cargo export tonnages or iron ore shipped from Port Hedland fell by a significant 8 percent in November.

One would expect a small decline given that there are fewer days in the month of November, but an 8 percent decline hints at a slight easing back of supply.

Mind you, tonnages from Port Hedland are still up by 22 percent over the past year and a romping 58 percent over the past two years, with 86 percent of this month's cargo headed for China or Taiwan.

Big numbers.

The news is less happy for the marginal producers as the lower spot prices continue to inflict merciless pain.

Atlas Iron (AGO) dumped more than a tenth of its small workforce in the past week, while Mt Gibson Iron (MGX) revealed the true extent of its weak position by dropping 360 staff.

Share prices have been accordingly obliterated as the mad dash to zero continues on its crash course.

Speculating in marginal iron ore producers has been a remarkably efficient way to lose 50-95 percent of your capital over the past 12 months.

Commodity companies by definition produce...commodities...and thus unable to compete on product differentiation and unable to build a "brand moat", they are often forced to compete on cost.

This tends to leave smaller marginal producers exposed when supply ramps up and commodity prices decline. 

In the resources sector, it is forever thus, and the larger producers tend to have economies of scale which puts them at an advantage.

Can Anything Help to Save Marginal Producers?

For those that can hang tough, a few things might help.

One would be an increase in the rate of demand, particularly from China (or stimulus measures which result in price speculation). 

Looks to be unlikely at the present time based upon the tenor of recent data flows.

Another saviour could be the stabilising effect of the Aussie dollar, which should in theory fall to reflect Australia's weaker position following bulk commodity price declines.

Is it happening? 

Well, we're getting there, but it seems unlikely to be quick enough to prevent further jobs losses in the iron ore space.

The AUD/USD pair touched 82.6 cents earlier before rebounding to 82.9 cents.

This is the lowest level we have seen in around four years meaning that export prices in Australian dollar terms are in much better nick than they might have been if the currency was still above parity!

A third (or is that fourth?) thing that could happen is that higher cost producers around the world capitulate.

The Reserve Bank of Australia had actually hinted that this could happen, with Australian miners seemingly well down the cost curve as compared to many global producers particularly those within China itself, although the Reserve's data sources seemed sketchy to say the least (which data isn't when it comes to China?).

My Twitter timeline seems to be full of news of miners capitulating or about to do so in Sweden, Brazil and China, though to be honest, it's kind of hard to work out what a lot of Tweeters are on about.

What is it with the #dozen #hashtags #thing?

I mean, has anyone ever searched the hashtag #iron in the hope of sourcing the latest news on iron ore? 

If they have they will be wading through diet advice on #iron deficiency, weightlifting tips and news on West Ham United Football Club before they find anything related to mining.

Very odd.

The Wrap

In short, downward price pressures remain and even with the dollar's decline several of Australia's producers are failing to produce profitable iron ore, which means that further job losses seem inevitable in Western Australia.  

The absolute numbers of job losses are not large, with the larger players retaining wide profit margins.

However the collapse in the iron ore price is reflective of a wider trend of falling commodity prices which is burning an impressive hole in the increasingly sorry-looking budget.