An interesting situation has arisen
in Australia in the light of the reduction in the price of Iron Ore. This hard
commodity has been very important to the Australian economy because of the
long-standing requirements of steel producers in China, where infrastructural and
other development has driven demand for the finished product to unprecedented
highs.
Now the glory days are over, however.
The Chinese have made it known that they are reconciled to slower economic growth than
heretofore and therefore the use of less steel. Apart from this, they have
their own Iron Ore mines, and only needed to import about one-third of their requirements
even at the height of the boom.
So the price of Iron Ore has been
dropping, hard. So important is the commodity to Western Australia that the rating
agencies, Moodys and Standard & Poors, have downgraded the debt rating of
that most important mining state from its former triple A status.
But here is the interesting part: The
very largest mining companies in Oz, BHP Billiton and Rio Tinto, have actually significantly
increased production in response to the fall in prices. The reason they have
done this is to make use of both their cash resources and their economies of
scale in order to further depress the price and drive smaller, so-called second
tier producers, out of business, thereby eliminating competition for when prices
start to rise again.
It is said that Chinese Iron Ore
companies are a particular target here. This means that the Aussie miners are
relying on the superior mechanisation of their mining operations to offset the
undoubted advantage in terms of labour costs that the Chinese have.
Implications for the Aussie
All this is important for the Aussie dollar,
as Iron Ore exports still accounted for a very significant part of the recently
published Australian GDP figures. Further falls will place greater pressure on
the economy.
As regular readers will know, we have
been watching the Aussie / US dollar pair for a little while now. Yesterday and
last night, in GMT terms, this pair made a further fall, after the false dawnof last week and is now, once again, flirting with a break through the 200 day
EMA to the downside. It is important that much of this fall can be attributed
to US dollar strength, but it could still be the start of a sustained move. We
will see.
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