The Iron Ore Price Crash That Will Crush Australia ?


Macro watchers and China observers can't stop talking about the collapse in iron ore prices, and what it says about the Chinese economy, and what it means for miners in Australia.

Morgan Stanley's Brendan Fitzpatrick has a note on Australian Metals & Mining which simply observes that things are "Getting brutal."

As for why things have gotten so bad, Fitzpatrick offers some straightforward explanations:

Why have spot iron ore and coking coal prices collapsed? In our view, the price weakness in steel making raw materials is a consequence of Chinese steel mills overproducing into an environment of demand weakness. Year to date in 2012, crude steel production has annualized at 717Mt vs 683Mt in C2011. Despite this, the most recent macroeconomic data clearly illustrate that industrial output in China (a key driver of steel demand) has slowed to levels not seen since mid-2009, and domestic steel
prices have sunk to 33-month lows as a result.

Raw materials de-stock has been triggered This steel price weakness has compressed steel cash
operating margins among Chinese mills despite sharply falling input costs. Ordinarily, we would expect to see a production response from the steel mills, designed to lower producer, distributor and customer inventories of finished steel. Instead, this intense operating margin pressure has triggered an aggressive raw materials destock as mills maintain output preserve market share and, in the case of the larger steel mills, meet employment obligations.

Purchases being pushed out – a ‘buyers strike’ As a result, many contract buyers of iron ore and coking coal have rescheduled deliveries to 4Q12 and 1Q13, with Steel Business Briefing (SBB) reporting that “mills were deferring deliveries of long-term contractual cargoes and buying small
lots of portside ore where needed to keep furnaces running.”. At the same time, spot buyers have stepped back from the spot market, forcing traders to scale back purchases and liquidate stocks, intensifying the short-term demand shock.

Fitzpatrick offers a few charts which get at the collapse.



Morgan Stanley