The Iron Ore Bust into a Housing Boom – by Greg Canavan (Daily Reckoning Australia – March 30, 2015)

http://www.dailyreckoning.com.au/

Irony is thick on the ground this morning as we head into a shortened Easter trading week. Just as Sydney property prices go absolutely bonkers, the iron price crashes.

Of course, revenue from the great iron ore boom helped to fuel the housing bonfire, along with regular petrol douses from RBA boss Glenn Stevens. But now, with iron ore crashing, property prices continue to detach from reality. It’s a cheap money driven boom if there ever was one.

In case you missed it, the benchmark iron ore price finished trading on Friday down US$2.22 to US$53.14, a new low. It was another dose of irony that probably knocked the price lower.

Last week, Fortescue Metals [ASX:FMG] Chairman and major stakeholder Andrew Forrest implicitly called on iron ore miners to form a cartel to control the price (and save his company from a slow death). Rio Tinto [ASX:RIO] boss Sam Walsh replied with scorn, which the market interpreted to mean that Rio will continue to dig up as much red dirt as it can. Hence the price crack on Friday.

The comments from Forrest indicate just how much damage the iron ore bear market is having on marginal cost producers. Aussie juniors won’t survive this price rout. It’s just a matter of time before they fold.

Fortescue’s cost curve is a little better than the juniors, but at current prices my guess is the company is barely making a profit. When you have a heavy debt load, that’s a dangerous situation to be in.

If Fortescue isn’t making a profit at these levels (after interest repayments), then it begs the question why it’s equity value is still around $6 billion. Clearly, the market thinks the low iron ore price environment won’t be sustained and that Fortescue will return to profitability.

That’s quite an assumption given the current state of the iron ore market. The biggest, lowest cost producers all have expansion plans in the works over the next few years. This wall of new supply hits at a time of waning demand. As The Australian reports this morning:

‘The unprecedented growth in Chinese steel production that underpinned Australia’s iron ore boom of the past decade could be over, with early signs this year’s production will fall for the first time in three decades.’

That’s right folks. China’s steel demand is set to fall as its credit bubble unwinds. Who would’ve thought!

Not the iron ore miners. They all consistently said China’s steel output would grow to over 1 billion tonnes per annum by 2030 and plateau at these high levels. Instead, it looks like steel output peaked in 2014 at around 840 million tonnes.

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