Iron ore’s price party is over, and everyone’s guessing what the hangover will look like


The iron ore price moves around a lot from day to day but the trend is now clearly down. The $US120 per tonne levels are firmly in the rear view mirror and prices closer to $US70 to $US75 could be on the near-term horizon.

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(Of course, this assumes there are no other major supply disruptions around the corner.)

Thus the new forecasting game in town is predicting where it will land in 2020. Estimates vary but Westpac economists, for example, see it at $US65, while Capital Economics sees it moving to $US70.

Needless to say, the latest price (off 2.7 per cent to $US80.11 on Friday and off about 6 per cent over the past week) is feeding into the share prices of BHP, Rio Tinto and Fortescue, which slid 0.3 per cent, 2.4 per cent and 5.5 per cent respectively on Monday.

It was in the middle of this year that the iron ore buzz was all about China inventories being dangerously low. That situation has now reversed and inventories in China’s ports are rising as demand is tapering off.

Seasonally, China’s iron ore demand is lower during its winter months as many steel factories slow down along with reduced weather-affected construction.

A conveyer belts loads up a barge at the Yangshan deep-water port in Shanghai.Credit:Bloomberg

China’s recent trade data for October showed imports of iron ore fell sharply.

But the real unknowable was, and continues to be, how quickly Brazil’s Vale can ramp up production.

It could be a long time before Vale is producing the same volume it did before January’s tailings dam disaster but it is very gradually attempting to add volume while under the strict eye of regulators.

Late last month, Samarco, a joint venture between Vale and BHP, was given the regulatory green light to restart its operations and has obtained all the required environmental licences four years after its tailings dam failure.

If production levels from Vale do not improve significantly in 2020, this restricted supply could put some floor under the iron ore price.

But the panic created by the Vale tailings dam collapse has settled and how the price movement plays out will be affected more by China demand than anything else.

This in turn requires economists to make a call on the trade war – and on the decisions of an unpredictable US President Donald Trump.

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World stock markets have gyrated wildly this year as hopes of a resolution to the US-China trade war have ebbed and flowed.

The current bout of optimism that a deal will be hammered out before the end of the year has buoyed equity and debt markets over the past week.

The conventional wisdom is that this time around the prospects look stronger as Trump wants markets and the economy to be in good shape as he moves into an election year.

But there are two schools of thought about how this will play into iron ore pricing. The first is that a truce would be a positive for the Chinese economy and its steel production.

The second is that it could play into a fall in Chinese government stimulus and that would be a negative for steel production and thus the iron ore price.

But what seems increasingly clear is that the 2019 iron ore price party is at an end. What’s not so clear is what the hangover will look like.

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