Wednesday, October 14, 2015

AUD: Demand for Australian iron ore is rising - HSBC

FXStreet (Delhi) – Paul Bloxham, Chief Economist at HSBC Global Research, notes that slower growth in China and a downturn in the mainland property market have seen falling demand for iron ore, as might be expected but demand for Australian iron ore has continued to rise and the reason is that Australia is the lowest cost producer in the global market.

Key Quotes

“Australian iron ore export volumes to China have risen by 8% y-o-y, while China has cut back on its own higher cost domestic production, which has fallen 8% y-o-y. Steady demand for higher grade/lower cost iron ore, largely from Australia, has seen the iron ore price remain steady at around USD50-60 a tonne for the past three months. We are forecasting the iron ore price to remain around this level over the next year or so. Although the overall iron ore story is a challenging one, Australia is faring reasonably well.”

“Falling commodity prices have taken their toll on a range of commodity-producing countries, with GDP declining in Canada, Brazil, Russia and South Africa in recent quarters. The Australian story has, so far, been a bit different, with GDP continuing to rise.”

“Most importantly, Australia is the lowest cost producer of iron ore, which is its single largest export, accounting for 17% of total exports (by volume). Being the lowest cost producer has meant that demand for Australian iron ore has continued to rise while other producers have been forced to cut back.”

“Australia produces around 55% of globally traded iron ore and over 90% of Australia's iron ore is produced at a cost that is below the current spot price of USD55 a tonne. By comparison, China produces around 20% of global iron ore, but the cost of production is estimated to be between USD80-110 a tonne.”

“Although the overall iron ore story is a challenging one, the trends are generally quite positive for Australia. If China continues to cut back its own production, in favour of lower-cost Australian iron ore imports, then Australia should continue to gain market share.”
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