Large iron ore mines on the Australian stock exchange drove prices to record highs on Tuesday.
This feat came about because of two factors. Iron ore trades just below record highs and the Australian dollar is much lower than it has ever been during such previous booms. This has resulted in fat profit margins for the miners.
But even if this trade hits new highs, there are clear signs that good times are ahead. Indeed, China is determined to depress iron ore prices in both the short and long term, and there are good reasons to conclude that it will do so sooner rather than later. There are three reasons for this.
The first is that global supply is waning after several years of extreme scarcity. The main source is the recovery in Brazilian production, which was badly damaged after the great dam collapse in 2019.
Brazilian exports are on the rise and by the end of the year will be 60 million tons above their post-accident lows. They are completely repaired within 12 to 18 months and are in full swing.
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China is also investing heavily in its own mines again. It does this automatically when the iron ore rises above $ 120. But it is also promoted by politics. This will deliver tens of millions of new tonnages this year and next.
Australian production has been slowed for the past six months by problems in the large port of Rio Tinto. But these problems have now been resolved and large new mines are also coming into operation.
So the supply will increase in the second half of this year and continue to increase until 2022.
The second reason China will succeed in its quest to crush iron ore soon is because of the peak of demand. In the past nine months, China has cut lending to commodity-intensive real estate and infrastructure construction sectors.
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There are many signs that sectors are now slowing down. This includes lower floors for their forests of vacant apartments. And borrowing from the local government, which is driving investments in roads, railways and bridges, has decreased significantly year-over-year. Together, these two sectors account for 70 percent of Chinese demand.
The third reason China appears to be getting close to its goal of lower iron ore prices in the short term is because of its attempts to regulate markets. In recent months, China has curbed its own steel exports at lower domestic prices; it is forcing steel mills to cut production, has slammed its futures markets and punished speculators.
None of this can work on its own. But together they add up to a polished boot stomp on many of the drivers of heavy iron ore imports. In addition, the many measures are unprecedented and speak for the desperation of reducing the price of iron ore as soon as possible. That is certainly also because Beijing is so angry that its trade war against Australia has backfired.
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It is well known that China plans to replace Australian iron ore in the long term by building African mines and dramatically increasing the recycling of steel scrap.
Given the runaway share prices of iron ore mining companies on the ASX, it is less common knowledge that the Chinese dictatorship is currently tightening the noose around iron ore.
It will probably soon be possible to choke off the oxygen.
David Llewellyn-Smith is the chief strategist at MB Fund and MB Super. He is the founding editor and editor of MacroBusiness and was the founding editor and global economics editor of The Diplomat, the leading geopolitical and business portal in the Asia-Pacific region. David co-wrote The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review. MB Fund is underweight in Australian iron ore mining companies.