A key indicator for iron ore prices is starting to look a bit ominous.
Have a quick look at the chart below:
The chart above is the BDI Baltic Exchange Dry Index (BDI), which is a shipping and trade index that tracks the change in cost of transporting a range of commodities.
It calculates the changes based on a range of ship sizes and routes around the world.
Since 22 October, it has declined significantly, and is down 43% since 24 July.
The price indicates how much demand there is for the shipping of commodities, iron ore being the commodity we are most interested in.
Iron ore prices starting to level off
Recently, iron ore prices have indicated they may be levelling off:
Combined with the latest news from Metal Bulletin, there are hints that Chinese demand is starting to taper.
As Business Insider reports:
‘The spot price for benchmark 62% fines tumbled 1.9% to $74.65 a tonne, leaving it at the lowest level since November 2.
‘Lower grade orders were also slammed with 58% fines sliding 1.7% to $44.84 a tonne.
‘In contrast to the performance seen in recent trade, higher grade ore actually outperformed with 65% Brazilian fines falling 0.4% to $92.60 a tonne. However, it now sits at a five-month low.’
Going into the winter months then, a softening iron ore price could come to pass.
Chinese outlook crucial to iron ore prices
Especially considering current Chinese plans to reduce steel output to curb pollution in the wetter winter months.
The BDI in some sense then may be acting as a forward indicator here, with more tariffs potentially in the offing.
Recent research out of the European Network for Economic and Fiscal Policy Research shows that in regards to the tariffs imposed by Trump:
‘Chinese firms pay approximately 75% of the tariff burden and the tariffs decrease Chinese exports of affected goods to the United States by around 37%.’
With China bearing the brunt of the trade war, the impact of these tariffs indicates that there may be future flow on effects to the major Australian iron ore producers, which include: BHP Billiton Limited [ASX:BHP], Rio Tinto Limited [ASX:RIO], South32 Limited [ASX:S32] and Fortescue Metals Group Limited [ASX:FMG].
As a result, it may be sensible to take a ‘wait and see’ strategy with these types of shares.
See how the winter curbs affect the price of iron ore, and whether rumours of a Chinese stimulus package firm up amid slowing Chinese growth.
For Markets & Money