HSBC comments on iron ore (gist was out yesterday, but more detail now thanks to LiveSquawk)
- Australian iron ore export volumes to China have risen by 8% y-o-y, while China has cut back on its own higher cost domestic production, which has fallen 8% y-o-y.
- Steady demand for higher grade/lower cost iron ore, largely from Australia, has seen the iron ore price remain steady at around USD 50-60 a tonne for the past three months.
- We are forecasting the iron ore price to remain around this level over the next year or so.
- Although the overall iron ore story is a challenging one, Australia is faring reasonably well.
- Falling commodity prices have taken their toll on a range of commodity-producing countries, with GDP declining in Canada, Brazil, Russia and South Africa in recent quarters. The Australian story has, so far, been a bit different, with GDP continuing to rise.
- Most importantly, Australia is the lowest cost producer of iron ore, which is its single largest export, accounting for 17% of total exports (by volume). Being the lowest cost producer has meant that demand for Australian iron ore has continued to rise while other producers have been forced to cut back.
- Australia produces around 55% of globally traded iron ore and over 90% of Australia's iron ore is produced at a cost that is below the current spot price of USD 55 a tonne. By comparison, China produces around 20% of global iron ore, but the cost of production is estimated to be between USD 80-110 a tonne. Although the overall iron ore story is a challenging one, the trends are generally quite positive for Australia. If China continues to cut back its own production, in favour of lower-cost Australian iron ore imports, then Australia should continue to gain market share.
With thanks again to LiveSquawk, who are way more than just live squawk! They've a free trial available to give them a go if you wish.
