Iron Ore Safe from Tariffs, Hands Aussie Businesses Fortunes
- Share prices from major Australian iron ore mining companies rising significantly.
- Iron Ore saved from the brunt of Chinese tariffs.
- Speculators look at West Africa with apprehension.
COVID-19 has created a unique macroeconomic environment for iron ore, with Chinese demand for the commodity skyrocketed in 2020. The International Monetary Fund’s forecast shows that China’s economy will grow from two-thirds of the size of the US to three quarters by the end of 2021 with construction as a key driver. On the 7th of January 2021, prices jumped up to US168.72 a tonne, whilst political instability wreaks havoc in the US.
China is reliant upon Australia’s Pilbara region for the majority of iron ore. Roughly sixty per cent of iron ore comes from Australia, with twenty per cent coming from Brazil and the rest coming from various sources, helping develop the country.
Brazil has struggled with iron ore production during 2020 due to COVID-19 and the fallout from the Vale and BHP iron ore operation dam collapse. However, as of late December 2020, the BHP/Samarco joint venture has resumed iron ore pellet production, with expectations of 8 million tonnes produced per year. In 2019 Brazil exported 60 per cent of all their production of iron ore to China.
Despite rising tensions between the Australian and Chinese government, iron ore has been safe from the worst impacts and as such, the best-performing commodity in this environment. The ‘soft ban’ on soft commodities and coal was mitigated by the performance in iron ore and as such, the Australian dollar has been rising. This of course is in conjunction with the falling value in the US dollar due to inflation, which has stifled the RBA’s interest rate cuts.
There is speculation currently that due to the tensions between Australia and China, Chinese companies will look to West Africa to fill the iron ore orders. However, outbreaks of ebola, political uncertainty and high construction costs are allaying speculator worries. It is estimated that should construction begin, there would be a market of less than 10 per cent of the iron ore volumes produced by Australian businesses. Vale in 2023 aims to bring up 100 million tonnes of iron ore back to the market.
Looking to businesses that have benefitted from this environment, mining giants such as BHP, Fortescue Metals and Champion Iron have had significant growth during this time. BHP since the COVID-19 outbreak has grown roughly 94 per cent from lows. Looking to Fortescue Metals specifically, the share price has grown in excess of 200 per cent, with COVID-19 impacts having little effect on it. In it's September 2020 Quarterly Report, FY21 has started strong with Q1 showing 58.4 wet megatons (wmt) mined, up from 57.2 wmt. Less ore got shipped, weighing in at 44.3 wmt from 47.3 wmt. Champion Iron also a dazzling bull run up from AUD1.38 to AUD5.34 at the highest point. These companies are showing promising growth signals with new joint ventures explored, improving balance sheets, strong cash flows along with other fundamental indicators of stability.
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