Deloitte has released a brand-new commodity review which examines whether iron ore’s time in the sun is over, the impact of the US and China trade war, and the exceptional gold price, and if it can last.
In the review, Deloitte’s National Mining Lead Partner, Ian Sanders, first begins with his top three observations. Here’s a look:
- Is iron ore’s time in the sun over?
This commodity review was named ‘Under the iron sea’ for good reason.
“Iron ore has had an extraordinary run in 2019, comfortably the best performing commodity in a volatile market reeling from trade wars and geopolitical disturbances,” Mr Sanders said.
“The recent sharp sell-off in iron ore is a sobering lesson of how quickly things can change in a volatile asset class like commodities. In mid-July, prices of the steelmaking raw material traded above $120/t, supported by profound disruptions across the seaborne supply chain and China’s steel-intensive stimulus program.”
The tailings dam tragedy in Brazil had a far greater impact than initially expected. Not only did it remove a significant chunk of export capacity, but it also highlighted the fragility and inflexibility of the seaborne supply chain.
With the major seaborne producers operating close to full capacity, it is not easy to quickly scale up production and fill the supply gap.
Mr Sanders said that this was good news for Australian iron ore producers making handsome cash margins at elevated iron ore prices and seeing their valuations take off.
“[It was] good for the broader Australian economy too with elevated iron ore prices boosting export revenues, increasing the terms of trade, materially adding to tax receipts and driving Australia’s GDP growth.”
Flash forward to late October and you’ll notice a 28 per cent decline in the benchmark iron ore price from Australia to China.
With miners warning on the 2020 price outlook, Mr Sanders says that iron ore is exhibiting all the elements of ‘a failed soufflé’ – “promising the world but ultimately falling flat on closer inspection”.
- A shard of light
The trade dispute between the US and China has cast a long shadow over commodity markets.
“It’s dampened investment, knocked business confidence, reduced industrial activity and ultimately weighed on commodity demand and pricing,” Mr Sanders detailed.
He believes that it is no exaggeration to call out trade tensions as the single biggest influence on commodity markets and the wider economy today.
“As well as directly affecting the volume of exports and imports, trade tensions breed uncertainty, trigger volatility in the world’s financial markets and weigh on industrial activity. The near-term outlook for commodities, particularly industrial metals like copper is highly correlated with the trade situation.”
Talks hinge on US demands for Chinese enforcement of intellectual property rights and the removal of industrial subsidies – two areas that are critical to the Chinese goal of doubling the size of the 2010 economy by 2020.
According to Mr Sanders, not only would these changes support the domestic US economy, but they would also ensure China’s path to becoming the world’s largest economy occurs at a more gradual pace, and on US terms.
“China is not rolling over, confident that tariffs will not impede its economic development. Expect more sparring and market volatility in the months ahead.”
Trade talks between China and the US are ongoing and both sides report that progress is being made. While there are outstanding issues still to be resolved, there is growing optimism that the first phase of a trade deal will be signed by the middle of November, in time for the Asia-Pacific Economic Cooperation meetings in Chile.
“This will be a very positive development for metals demand and pricing albeit one reserves judgement until a deal is fully locked in,” Mr Sanders commented.
- All that glitters is…
Gold is doing exceptionally well in a generally challenging environment for commodities. Spot gold is trading just under US$1,500/oz, which is close to a six-year high.
Unlike the industrial commodities, Mr Sanders says that a volatile macro backdrop is working in gold’s favour.
“Geopolitical disturbances and an increasingly unpredictable global economic outlook play to gold’s classic defensive qualities,” he shared.
“As risks escalate, investors seek refuge in so-called ‘safe haven’ assets like gold, a commodity that trades more on fear and investor sentiment than underlying physical supply-demand fundamentals.”
The ideal brew of falling bond yields, the pivot towards easier monetary policies, increased economic anxiety and a desire by Central Banks globally to diversify reserves supports the latest gold price rally.
“It is a rally driving gold producer earnings, boosting valuations and providing the catalyst for deal-making in the sector,” Mr Sanders says.
Now the question is – can it last? Mr Sanders maintains that the foundations driving the gold price rally ‘look sustainable’, particularly as the global economic outlook becomes more uncertain.
However, he suggests keeping an eye on those all-important China-U.S. trade negotiations.
“An earlier than expected resolution to the trade conflict could erode some of that safe-haven support and send investors elsewhere in search for better returns,” he concluded.
The report further analyses the policies and economic factors that are impacting the price of all major commodities, and provides an outlook for the major metals including Iron ore, Coking coal, Thermal coal, Uranium, Zinc, Copper, Lead, Tin, Aluminium, Nickel, Gold, Silver, Palladium and Platinum.
Deloitte’s latest commodity review: ‘Under the iron sea’ can be found online here.