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On Tuesday the market watched in awe as the iron ore price was elevated to eye watering levels of $US108. By Wednesday, fresh speculation over marginal additions to supply caused the Chinese iron ore futures to wobble – the price dropped 2.3 per cent.
When a commodity has soared to a five-year high in a matter of months, wild swings are not surprising.
But make no mistake 2019 will go down in history as a vintage year for iron ore.
Even if the price dropped significantly in the second half of this calendar year to the $US80 levels it traded at towards the end of last year, the high prices for the first five months of this year would have already bolstered the profitability of the major Australian producers and the coffers of the federal and West Australian governments.
We haven’t seen iron ore prices at this level since 2014.
If the current spot price was factored into 2020 financial year earnings for our major miners, their profits would spike 60 per cent, according to analysts.
And a year at these prices would add about $4 billion to federal government coffers.
Already this calendar year Rio shares have risen 38 per cent, Fortescue stock has doubled in price, and BHP’s shares are 12 per cent higher.
How much is left in the tank for the iron ore price run and how long it can be sustained at levels above $US100 has left forecasters at a loss; they have had to revisit their assumptions as the price trajectory regularly leapfrogs over their targeted iron ore prices.
Back in February, CBA commodities analyst Vivek Dhar predicted the iron ore price could hit $US100 – a view that at the time was seen by some as outlandish.
Three months on and the product that feeds Chinese steel mills is in even higher demand, Chinese stockpiles are at a dangerously low level, supply in the first three months of the year from Australian producers was curtailed by weather events and most importantly the production issues that have plagued Brazil are not not getting any better.
Since the mine tailings dam burst in Brazil in January, the ripple effect and the actions of regulators and courts have forced suspensions of various operations – including dams and mines.
It has resulted in a roller-coaster ride for the iron ore price.
In May, Brazil’s major producer, Vale, told prosecutors in the state of Minas Gerais that a dam was at risk of rupturing at its Gongo Soco mine, about 60 kilometres from where its Brumadinho dam collapsed in January, killing more than 230 people.
The Brumadinho dam disaster and subsequent mine and dam closures in Brazil had prompted Vale, the world’s biggest iron ore miner, to slash its iron ore sales estimate for this year.
Hopes that Vale could increase its shipments were dashed early in May after a court ordered a halt to its operations at its Brucutu iron ore mining complex, reversing a lower court decision that had allowed the mines’ activities to resume.
Analysts have generally underestimated the lengthy regulatory fallout and the repercussions associated with industrial disasters. This time is no different.
And they certainly misread the strength of China’s steel output this year – which, on an annualised basis, topped 1 billion metric tonnes.
Few have been willing to formally predict how long this iron ore boom will continue because it is not a cyclical one.
However, the general consensus is that markets should not factor in the resumption of much additional supply from Vale this year.
And this should put a floor under the price.
Some new supply (from marginal producers in India and China) may come on stream later this year – but new entrants will also be waiting to hear about the length of supply disruptions in Brazil.
Currently there are a raft of estimates for 2019 at between $US90 and $US95 and most projections fall back to $US80 levels in 2020.
For investors with iron ore stocks, 2019 is the year they hit the jackpot.