Iron ore has had quite a ride over the past year. Investors on the right side of the trade have pocketed impressive gains. On the flipside, those chasing yesterday’s news have suffered equally impressive losses.
Our aim today is to get you on the right side of the trade. And we do that with a little insight from Donald Trump.
But first, have a look at the chart below. It shows you the one-year price history in US dollars.
Source: Business Insider
[Click to enlarge]
As you can see, iron ore hit a low of US$56.67 in September last year. From there, it enjoyed a largely unexpected run, reaching US$88.80 in February. After dropping below US$55 in June, iron ore rebounded this month. At time of writing, it’s trading for US$64.36 per tonne.
That puts the base metal up 14.2% since this time last year. But I don’t expect that to last. In fact, I believe that last year’s lows will be retested.
Iron ore, as you likely know, is used to make steel. It’s Australia’s top export, and China is our largest customer. But the Chinese stand accused of dumping cheap steel into global markets. Which is where Donald Trump comes into the picture.
From The Guardian:
‘Washington is looking to reduce excess global production capacity of steel, particularly in China. Trump, backed by a small group of allies, told a meeting of top officials at the White House on Monday that he wants to impose tariffs as high as 20% on the metal.’
Malcolm Turnbull managed to secure Australian manufacturers an exemption from any possible US tariffs. On paper, that looks good.
But the reality is that if Chinese steel is priced out of the US market, Chinese demand for Australian iron ore will almost certainly fall. And even a small fall in Chinese demand could see iron ore prices take a big hit.
Something to keep in mind if you’re invested in companies like Rio Tinto Limited [ASX:RIO] or BHP Billiton Limited [ASX:BHP].
For now, the market seems to be ignoring the implications. BHP and Rio are trading at three-month highs. And iron ore is up 1.7% over the past week.
But then pundits have ignored Trump since his first day in office. And they appear consistently surprised when he follows through on what he has clearly stated he intends to do.
In this case, that’s to slap hefty tariffs onto cheap Chinese steel. Ignore ‘the Donald’ at your own peril.
Now let’s have a look at the week gone by…
This week in Markets & Money
Vern kicked off the week with a look back at 2007. As the world sleepwalked towards financial catastrophe, governments and global media focused all their attention on climate change. In Australia, Kevin Rudd said the challenge was ‘so great we should be at the stage now in this country where climate change is beyond politics.’ And, of course, Al Gore jumped onto the bandwagon with An Inconvenient Truth. A fabrication Vern calls a ‘convenient lie’. But by 2009, that had all changed. By then, pundits were busy dealing with the fallout from the most severe financial crisis since the 1930s. Their solution? Solve the debt crisis with…more debt. And here we are once more, blindly inching towards the financial abyss. For Vern’s full analysis, you can read Monday’s Markets & Money here.
On Tuesday, Jason took a look at Janet Yellen’s claim that the world won’t see another financial crisis in our lifetime. He noted that global debt levels stood at US$217 trillion last month. Or 327% of global GDP. And yet, according to the world’s leading central banker, ‘she’ll be right, mate’. Jason turned to one of his favourite indicators to analyse the outlook for the global economy: Crude oil. You can read his full bearish take here.
On Wednesday, Jason turned his attention from oil to gold. With gold hitting a four-month low, investor morale is dwindling. And though the yellow metal might see some short-term rebounds, the mid-term outlook remains gloomy. The European Central Bank (ECB) money-printing experiment has created a giant debt pile. And it’s not just the ECB. Central banks across the world have printed nearly US$14 trillion, Jason writes. The inevitable outcome of this much debt is defaults, on national levels. And once the debt crisis begins in earnest, investors will look to sell anything they can get their hands on. Even gold. For the full story, go here.
If there’s one thing governments hate, it’s a lack of control. As I wrote to you on Thursday, this obsession saw a new series of salvos launched in the global war on cash this week. In Australia, the federal government’s cash economy taskforce — yes, there is such a thing — came out swinging. Wildly. Recommendations to stem the scourge that is cash include implanting microscopic devices tracked by global satellite networks. Seriously. Of course, we know the governments’ real motivations. And there is nothing benevolent about them. For the full story — including why global governments’ best efforts are doomed to fail — click here.
In Friday’s Markets & Money, Vern explained just how important the margin is. Meaning elections are won or lost by 1–2%. And an economy shrinking by just a few percentage points is enough to create major hardship, as witnessed in Greece. In a disturbing sign for Australia, residential power disconnections are on the rise…if only marginally. And more people are reducing or cancelling their private health coverage. With real wage growth non-existent and debts piling up, this won’t end well. You can read Vern’s full take on the situation here.
That’s all for today.