Monthly economic e-news – August 2020
11 August 2020
By Craig Turnbull
Chief Investment Officer
Iron ore offers some good news for the Australian economy
It’s no secret that the COVID-19 restrictions have had a devastating impact on the local economy with the International Monetary Fund forecasting that Australia’s economic growth is likely to fall by 4.5% this year.
However, this is a lot better that many other countries, and once again our mining exports are making a valuable contribution. Increasing demand has seen the global spot price for iron ore rise by more than 25% since April, breaking back above US$100 per tonne in June.
Source: Market Index (standard NYMEX traded 62% Fe)
What is driving the demand for iron ore?
Iron ore is essential to produce steel and demand has been surging as Beijing embarks on a US$600 billion infrastructure package to stimulate the Chinese economy in the wake of COVID-19.
Chinese steel production hit an all-time high of 3.05 million tonnes in June and despite growing trade tensions, Australia remains the number one exporter of iron ore to China. Our miners shipped more than 83 million tonnes in June, the highest monthly figure for almost three years.
At the same time, iron ore production has fallen dramatically in Brazil, one of the countries hardest hit by the pandemic. The disruption to mining operations has restricted global supply and helped to push up spot prices.
However, Brazilian exports are expected to recover over the next six months and analysts predict that the spot price for iron ore is likely to drift down and settle between US$70 and US$90 per tonne.
These prices are still well above the long-term average and should continue to generate strong export revenues for Australia over the short to medium term.
What about our other mining exports?
While iron ore is enjoying a stellar run, the news is not so good for one of Australia’s other main mining exports, thermal coal.
Thermal coal exports have been hit hard by the trade tensions between Beijing and Canberra. China is currently restricting coal imports, forcing electricity generators to pay much higher prices for locally mined supplies.
These import restrictions, together with a sharp drop in demand from India due to the pandemic, has seen the Australian coal price fall 25% in six months, finishing July at just US$51.56 per tonne.
However, this is just part of a longer term decline in the price of thermal coal which is down by more than half over the last two years.
Cheaper renewable energy and liquified natural gas has prompted some of our big miners to plan for a low carbon future. In recent years, Rio Tinto and BHP have been divesting their thermal coal mines both here in Australia and overseas.
This leaves Glencore as Australia’s largest thermal coal exporter. However, recent falls in commodity prices reduced the company’s half-year net income by around 40%, prompting the Swiss miner to announce plans to cut coal production in the Hunter Valley, NSW.
What does this mean for the economy and for investors?
Record iron ore shipments has been good news for our bottom line, helping Australia to record our 30th successive trade surplus in June with the value of our exports exceeding our imports by $8.2 billion.
The surge in iron ore prices has boosted the share prices of local producers with BHP and Rio Tinto rebounding strongly since March, and Fortescue Metals almost doubling over the same period.
Higher iron ore prices have also been positive for the Federal Budget. It’s estimated that if prices remain strong it could mean more than $1 billion in additional tax receipts in the 2021 financial year.
Some good news for a government facing record deficits for some time to come.
Markets at a glance
for the month ending 31 July 2020
Australian shares1 up by 0.50%
Australian Government Bonds yield2 down to 0.815%
Australian dollar up to US$0.7213
Cash rate3 steady to 0.25%
International shares4 up by 4.69%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)