Australia Iron Ore Exports to China Cool, Compounding Price Drop

(Bloomberg) -- Australia’s iron ore shipments to China are slowing just as a decline in prices of the key steel-making ingredient is taking hold, potentially weighing on the Aussie dollar and compressing future trade surpluses.

In volume terms, Chinese imports of iron ore fell 4.2% in October from a month earlier, government data showed Sunday. China is yet to provide a value breakdown, but a recent slump in prices -- down nearly 40% since August -- suggests this will be weaker as well.

Australia, the world’s largest exporter of iron ore, is caught in a pincer as troubles in China’s property industry and environmental concerns weigh on price and volumes. The Aussie dollar, which historically tracks a combination of commodity prices and yield differentials, has so far withstood the decline.

“Falling iron ore prices is one of the factors that may keep some downward pressure on the currency, at least in the short-term because of that demand story,” said Diana Mousina, senior economist at AMP Capital Investors Ltd. 

She notes that at the same time, LNG and coal prices have been very strong, helping offset the overall impact. “So I guess there’s been a bit of change in which commodities are driving the currency,” Mousina said.

Australia’s budget in May assumed iron ore would follow a straight line down to $55 a ton in 18 months’ time. The metal ore is now trading in the $90-range.

China’s steel production in September slumped 21.2% on the year to 73.8 million tons, the lowest monthly haul since 2017.

It’s all a long way from the middle of this year when Australia’s iron ore shipments were pulling in over $200 a ton, swelling the nation’s coffers with higher tax receipts from mining companies. The trade surplus Down Under also ballooned, reaching a record A$14.7 billion ($10.9 billion) in August.

Australia reports its October trade data on Dec. 2.

“China’s demand for iron ore has weakened as policy makers aim to cap steel output in 2021 at 2020 levels in order to reduce emissions,” said Vivek Dhar at Commonwealth Bank of Australia. “The Winter Olympics in Beijing in February will likely mean strict enforcement of steel mill activity for the next few months.” 

©2021 Bloomberg L.P.