Amidst dismal GDP growth figures of 0.3% for September quarter, another grave concern for Australian economy is the plummeting price of iron ore, given it is nation’s biggest export ahead of coal and petroleum products.
The iron ore price has been hovering around US $66/ t levels. As on 5th December 2018, steelmaking raw ingredient Iron Ore posted a fall of 2.83% at close price of $65.69, with a previous close of $67.55. There was a sharp tumble observed in late November also. The slump in iron ore spot markets is attributed to moderating demand from top importer China, its shrinking steel sector as well as fall in commodity prices.
China, world’s largest consumer of metals is the major trading partner of Australia, world’s largest iron ore exporter and second largest producer. There are growing concerns about slowdown in Chinese growth on grounds of trade/tariffs war and South China sea clash between two major global superpowers- US & China, which is also pushing down nation’s iron imports.
China’s steel industry is gradually slowing down on account of blanket tariff policy by US Donald Trump as well as slowdown in demand. In its recent report, Morgan Stanley has anticipated fall in China’s crude steel production till 2023, owing to shrinking industry. Recently, World Steel Associated posted alarming expectation of stagnating Chinese steel demand this year followed by 2% contraction in 2019.
ASX core players such as BHP Billiton Limited [ASX: BHP], Rio Tinto Limited [ASX: RIO] and Fortescue Metals Group Limited [ASX: FMG], accounting for 90% of Australia’s iron ore production have experienced a fall in share market lately.
Rio fell by 2.04%, BHP by 1.35% and FMG by 1.22% as at December 06, 2018. The three stocks continued the fall on December 07, 2018 by edging to lower levels. It is to be noted that iron ore is a premium quality product for many of these miners and any fluctuations in the price impacts the stock performance.
At the domestic level and as per the recent data released by Australian Bureau of Statistics, nation’s current account deficit has narrowed to $10.7 billion for June-September quarter 2018, against the $13.5 billion in the previous quarter. However, there is weaker outlook on Australian exports particularly iron ore.
The iron price is expected to experience volatility in the current global scenario of US-China clash, slowing Chinese economy, shrinking Chinese steel sector and slump in iron demand. S&P Global anticipated fall of 2% in Chinese steel production and there is weaker steel consumption expectation by Moody’s Investors Service.
However, iron ore spot price and share price of iron producing companies is worth keeping an eye for as also suggested by BHP which rides on stronger iron ore demand expectation. As per recent announcement, BHP-world’s largest iron ore company did not revise down its iron ore target output despite shrinking Chinese demand.
Even Fortescue Metals Group, fourth largest iron ore producer in the world, is launching new medium grade iron ore fines product and aiming at project expansion.
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