Monday, September 8, 2014

Australian miners play hard ball | Possible implications for the Aussie dollar

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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