Iron ore has proven to be one of the resilient commodities in face of market volatility after Covid. This can be attributed to the V shaped economic recovery in China where the 2020 steel production was above 2019 and the prior 5 year trend.
The price chart of the iron ore price shows the price trend over the last 2 years. This shows a distinct recovery in the prices from the lows seen 2018.
Like previous commodity cycle lows, a commodity bear market will only truly bottom when it has fallen off most investors radar. We think this was the case in 2018 which was the short term lows after the end of the previous commodity boom. Right now iron ore is in another bull market while not as crazy as we saw in 2007/8 but this run still got legs.
This means that for diversified miners like Rio Tinto or BHP, the management teams will so switch from capital preservation with an emphasis on de risking the balance sheet to growth mode. We are in the early stages of the new cycle and we expect a real pick up in earnings for the miners as its investments come to fruition.
Long Term Iron Ore Price
Much of whether the current recovery in the iron ore price is sustainable depends on the performance of the Chinese economy. The danger is the if there is any slow down in real estate construction in Tier 1 cities.
Iron Ore impact on Australian Dollar
We are keenly watching in the Aussie Dollar which is one of the biggest beneficiaries of a sustained high iron ore price.
Chart below shows the total iron ore export volume and the amount exported to China.
Australia Iron Ore Exports
What is clear is all the growth in iron ore production since 2008 has been absorbed by China. Therefore the future price of the commodity has important implication for the Australian dollar and this will be dependent on China manage a soft landing in its current economic slowdown.