Iron Ore and Property Crash? Not So Fast

In today’s Money Morning…misleading headline gives wrong impression on iron ore and property…why iron ore/property crash is unlikely for at least a few years…how to trade the ASX during this period…and more…

EDITOR’S NOTE: In today’s edition of The Money Morning Podcast, I sit down to speak with Callum Newman about all things iron ore. If you’ve seen BHP and Rio soaking up the gains and propping up the market, just wait until you hear what Cal has to say about smaller iron ore companies and his strategy for trading them.

I had a great chat with Callum ‘Cal’ Newman of Catalyst Trader yesterday about iron ore and where he thinks the iron ore price could go in both the short and long term. It really got me thinking about Australia’s most important export.

You see, every time I’ve thought something about iron ore, I’ve got it wrong.

I said to Cal, it’s a bit like George from Seinfeld in the ‘Opposite Day’ episode.

I should just do the opposite of whatever I think. So hopefully I don’t get it wrong again!

A couple years back I got deep into the reeds on iron ore — I started looking at weather patterns in the Hubei province (the largest steel-producing province in China), the frequency of production curbs, the changing demand for iron of different grades, margins, PMI trends, port activity, and the Baltic Dry Exchange Index [BDI].

Turns out, there are far smarter people than me trying to get a grip on the iron ore price.

They are armed with algorithmically tracked and sorted satellite imagery, bigger datasets, and more contacts on the ground.

Misleading headline gives wrong impression on iron ore and property

So, when I read this piece from MacroBusiness, it started a chain reaction in my mind, given what I’d heard from Cal.

The piece even garnered some attention via 9news — the mainstream loves a doom-and-gloom headline because put simply, fear sells.

Here are some excerpts from the MacroBusiness piece (emphasis added):

First, the US/China cold war is bifurcating the global economy into liberal and illiberal economic blocs. Australia has cast its lot in with the former. This makes Chinese reliance upon Australian iron ore strategically unviable.

Second, the Chinese economic development model is running out of rope. Its urbanisation is all but complete in construction volume terms. It can continue to overbuild but this is now hurting its long-term growth prospects as misallocated capital and debt kill off productivity. It must shift away from building as its primary growth driver.

Third, these two factors combine most forcibly in Chinese politics. CCP legitimacy will fail as the economy slows. It is already being replaced with deliberately stoked nationalism. This makes external conflict inevitable, most particularly in Taiwan. Yet Australia has a virtual veto over Chinese military aggression so long as China relies upon it for iron ore.

The timetable for the cut-off will be this decade, probably the second half of it. China will decide precisely when by whatever combination of slowed urbanisation and magnitude of investment it determines is optimal.’

Concluding (emphasis added):

That said, the very long term would get much more difficult for house prices with income growth yoked exclusively to non-existent productivity advances post-iron ore.

I wouldn’t recommend owning the ASX. Miners will be wiped out. Banks, too, as their margins are squashed by the RBA. That said, crashed yields would quickly restore a bid for the wider bourse.

In short, the end of iron ore to China is not the end of Australia. It would be a repeat of 2015, only permanent, but just as survivable as the cratered currency rebalanced the economy.

I’m with David Llewellyn-Smith from MacroBusiness on these long-term strategic shifts, the problem is that 9News may’ve misrepresented his views a bit with the headline to generate clicks.

It’s all about the timeline. ‘Aussie house prices “at risk” from China shift on iron ore’ doesn’t quite have the same ring to it as ‘There could be an Aussie property market crash sometime in the next 5–9 years.’

So, remember, Llewellyn-Smith isn’t saying the iron ore crash and property crash is on the immediate horizon.

And given what Cal and I discussed in the podcast, the outlook for the iron ore price is remarkably rosy for the next few years.

Here’s my reasoning.

Why iron ore/property crash is unlikely for at least a few years

These are the key points regarding iron ore:

  • China can’t wean itself off Aussie iron or for a long time because Vale SA in Brazil is not a desirable option politically. Due to friction between Bolsonaro and the CCP, who do they choose? The long-term partner (Australia) with undesirable rhetoric, or the smaller, more distant partner which was largely offline struggling with supply that also has undesirable rhetoric?
  • The rebound demand growth from India’s burgeoning steel industry, should they get the virus under control. It’s bad over there right now, but in 6–12 months demand there could offset any production ramp up out of Brazil.
  • China simply can’t afford to slow down. Their debt burden is in the same range or worse than other large Western economies.
  • The global demand picture looks pretty good with all the cheap or free money flying around — a European rebound, a US government hell bent on infrastructure, and a construction boom. The playbook from governments is always the same, build your way out of the hole with fiscal stimulus and infrastructure projects (and that infrastructure needs steel).

Here are the key points regarding the property market:

  • RBA unlikely to taper stimulus for a long time. Inflation may take much longer to arrive in Australia than in the US.
  • Economy looking reasonably strong for now — as per the Australian Financial Review:

    Surging commodity prices, particularly iron ore, pushed up the value of mineral exports to a new high, driving the quarterly surplus to more than 3 per cent of GDP. Following the release of the positive data, market economists revised up their March quarter gross domestic product (GDP) growth forecasts to a robust 1.5 per cent, from 1.1 per cent. That would take annual growth to 0.6 per cent.’

  • When international travel does resume, demand for property from overseas should work in concert with RBA measures.

How to trade the ASX during this period

No doubt there are a number of factors to consider.

A value pivot triggered by rising bond yields, a commodities boom, a manufacturing crunch triggered by a chip shortage.

There’s a lot of risk out there, but also a lot of opportunity.

Being able to manage that risk and remove your own psychological weakness from the equation is what it’s all about.

And there’s a great guide out there for your trading journey called Murray Dawes.

He’s abreast of all of these variables and watches the market like a hawk.

As one of his subscribers remarked:

‘[Murray] provides great trades but also TEACHES you things about trading that no-one else I am aware of offers.

Another said:

He is open, honest and transparent about everything he does. I could not ask for a better mentor.’

You see, Murray is an educator, not just a trader. He aims to beef up your skillset and get you into compelling (and frequently profitable) trades.

Regards,

Lachlann Tierney Signature

Lachlann Tierney,
For Money Morning

PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here


Lachlann Tierney is an Analyst for Money Morning and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. Recently he has been working with Ryan Dinse. Lachlann is involved in two publications:


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