Monday, September 22, 2014

Iron Ore continues its slide | Situation to get worse before it gets better – likely effects on the Aussie dollar

A little while ago we highlighted (Australian miners play hard-ball) the efforts of the major mining companies in Australia to use their economies of scale and efficiencies of automation, in conjunction with the downturn in the price of Iron Ore, the chief component of steel production, to drive smaller rivals out of business. In the face of declining demand they have actually massively ramped up production, which has the effect of driving prices even lower than they would be given the decline in demand, especially from China.

Yesterday Iron Ore went below the significant figure of $US80 per tonne, which makes it 40% lower than at the beginning of the year. In a detailed analysis, Callam Pickering, writing in the Australian Business Spectator, delves into the implications for this for unemployment in Oz, the Australian economy and the fate of the Aussie dollar. As he says:

The RBA’s commodity price index, which has already declined by 15% since the beginning of the year, should fall by another 4% to 5% in September. The terms of trade and the Australian dollar won’t be far behind”.

Situation to get worse before it gets better

As is well known by now, Australia has seen the writing on the wall in terms of the mining industry. The monetary and political authorities have decided to move from an export led, commodity fuelled economy to one that is powered by internal consumption. All of this is in the light of an on-going softening of the Chinese economy, which country has been the main consumer of Australian mining production.

The problem is that according to the most recent GDP report for Australia, mining exports still account for the bulk of the country’s wealth. This precipitate fall in commodity prices, coupled with the very significant levels of redundancies from a consolidating mining industry, can only be bad news for our friends Down Under and, by extension, for their currency.

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