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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 8 March 2016

Whoomp (there it is)

Iron ore rebound

Much of the finance news today will likely be concerned with the rebound in commodity prices, which is positive news for an exporting country such as Australia.

Crude was up yet again by another +5.5 per cent overnight to a fresh 2016 peak of $40/barrel, while as futures markets had suggested yesterday the iron ore price went absolutely ballistic in recording its largest gain since indexation began, exploding by +18.6 per cent. 

This takes the gain over the last two days to an extraordinary +24.5 per cent.

According to Scutty over at Business Insider this leaves the rebound in price at +66.4 per cent since December 11 (refer to some cool charting here).

In commodities markets the commentary is often backfilled to respond to price action.

As such there have been the full gamut of possible explanations for the move: China potentially loosening its monetary policy further, major planned new infrastructure projects, rising house prices in China, commodity production limits and cuts, supply disruptions, and plenty more.

While this massive rebound in iron ore prices is obviously tremendous news for revenues and royalties, it is worth remembering that the trend in the terms of trade and commodity prices has been down for some years now, and such resurgence could yet prove to be another bull trap on the otherwise downwards trajectory.

Pilbara Ports

The February iron ore cargo figures from Port Hedland in the Pilbara showed an +8.5 per cent increase in export volumes in February to 36.63 million tonnes. 

The January result has been impacted a little by Cyclone Stan (as well as the usual seasonal issue), as you can see in the chart below. 

The huge ramp up in supply has evidently lost some pace over the past year, with Port Hedland iron ore cargo volumes +2.7 per cent higher than in February 2015. 

It is notable that the volume of cargo shippd to China has slowed, lunar new year distractions notwithstanding.

There have also been well documented suply disruptions in Brazil, which included a tragic mudslide at the Samarco mine. 

The wrap

A welcome +66.4 per cent rebound in iron ore prices is obviously great news for Australia. Whether or not prices prove to be sustained is another matter.

The nature of commodities markets is that prices and therefore revenues can be cyclical.

But as Reserve Bank Governor Glenn Stevens has pointed out, although spot prices may be well down from their peaks, we are shipping ore cargo in huge volumes that could not have been imagined even one decade ago.

This has left Australia, and the State of Western Australia in particular, much richer as a result, and as such the mining boom is a good news story.

In a speech in December, Stevens noted that the resources boom would permanently boost income and wealth, with the bulk commodity price and volumes considerably higher than one decade ago, even when they were at their most recent nadir.