Trade War Implications for Price of Iron Ore

The recent APEC conference in Papua New Guinea (PNG) highlighted how far apart the US and China still are on trade — but there has been little discussion of what implications the trade war has for the price of iron ore.

Before discussing how the trade war relates to iron ore however, a bit of APEC background is needed:

  • Announcement of US-Australian efforts to curb Chinese influence in the South Pacific
  • US Vice President rails against forced technology transfer, intellectual property theft and military movements in the South China sea
  • Chinese diplomats storm PNG Foreign Affairs Minister’s office demanding changes to draft communique
  • No agreement over draft communique reached

Prime Minister Morrison noted that:

If the major powers here are not going to agree, we shouldn’t be pretending they do and we shouldn’t be trying to smooth that over for the sake of a communique.

Given the staunch atmosphere surrounding the conference, the major achievement of the conference must be that it let the US and China get their angst out before a far more crucial Trump/Xi Jinping meeting at the G20 forum in Buenos Aires on 1 December this year.

In a week and a half, markets will know far more.

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A potential deal or softening of stance could benefit price of iron ore

For those who perform Trumpian twitter analysis, there are signs the President is softening his stance towards a deal.

The South China Morning Post notes the following:

From July 6, when Washington slapped the first round of duties on Chinese goods, to the most recent tariff announcement on September 18, Trump tweeted about China 20 times, trade 42 times and tariffs 21 times.

Since then, Trump has only mentioned China five times – the latest on November 1, when he said he had a “a long and very good conversation” with Xi on many subjects, with a “heavy emphasis on trade”. He has mentioned tariffs twice since September 18, and trade 19 times – mostly in reference to the renegotiation of the North American Free Trade Agreement, or in relation to other trade partners.

A deal could have major implications for Australian iron ore shares given our massive reliance on China as an export destination:

Australian Trade Partners

Source: The Sydney Morning Herald

Indeed, some 84% of Australia’s iron ore heads to China.

As we have covered earlier this week, slipping Chinese demand is showing up in falling shipping costs.

Furthermore, as recent research shows, China is bearing around 75% of the cost of the trade war.

The primary mover for iron ore prices has consistently been Chinese GDP, among the other factors.

Three scenarios for Australian iron ore shares

As a result, there are three scenarios that could play out.

Scenario 1) Australia could continue to see iron ore prices level off and begin to drop if a deal is not struck in Argentina on 1 December and trade tensions threaten to boil over.

Falling iron ore prices affect the bottom line of the major producers such as, BHP Billiton Limited [ASX:BHP]Rio Tinto Limited [ASX:RIO]South32 Limited [ASX:S32] and Fortescue Metals Group Limited [ASX:FMG].

Scenario 2) Even if a deal is not struck, a softened stance from the two countries could be a minor win for shares of these companies.

Scenario 3) Any announcement that a deal will be reached will potentially send the market into raptures, in particular iron ore producers.

If you can read the Trump tea leaves, a big movement in these shares could be in the offing.

For the moment, I currently see Scenario 2 as the most likely. If the US stock market dips sharply however, Trump may opt for a Scenario 3 approach. The ball really is in his court here.


Lachlann Tierney,
For Markets & Money

PS: Get the names of the best mining stocks on the ASX right now by downloading our free report here.

Lachlann Tierney is a writer for Markets & Money. He has lived and studied in the US, the UK, and Australia. With an MSc from London School of Economics (LSE) he brings a strong grasp of geopolitics and world affairs to his analysis. Lachlann is always on the lookout for the news that will give you an edge in tomorrow’s markets.

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