Lucrative Australian exports such as iron ore face a tough year as flatlining global growth and sluggish demand are set to topple resource prices from extravagant highs, analysts said.
Recent months have seen signs of stress in the country’s mining boom, which has poured billions of dollars into the national economy over the past decade, with some mines shutting and projects scaled back amid the financial turmoil.
And after seven years of sky-high growth fueled by Asian demand, the price of exports such as iron ore and copper is set to fall markedly as metal values contract, analysts said.
“The luxurious commodity prices, and importantly the volumes, particularly in iron ore and coal ... just aren’t going to be there next year,” said Tim Schroeders, the Melbourne-based portfolio manager at Pengana Capital.
Schroeders said a fall of between 60 percent and 70 percent in most metals last year — combined with slowing growth, large inventories and frozen credit markets — meant that commodities should brace for further price falls this year.
“It’s very difficult to ascertain price outcomes at the moment but we are getting back to very bombed-out levels in a lot of these commodities,” he said.
Schroeders said the impact of falling commodity prices in Australia — where resources excluding gold accounted for the biggest slice of export earnings in 2007, equal to 34 percent of total exports — would be significant.
“And I can’t see another sector of the economy in the short term picking up that slack,” he said.
China’s continued growth was the key positive for the mining industry but even that was unlikely to lift the gloom until the middle of the year, he said.
“And we may well have another half year of malaise before the inventories are worked off, the stimulus packages start to work through the system and people generally feel a bit more confident that the world isn’t ending,” he said.
Soon-to-be-negotiated contract prices for iron ore, a vital ingredient in steelmaking and one of the country’s most valuable exports, will be a key indicator of Asian demand this year, analysts say.
Major miners BHP Billiton and Rio Tinto last year agreed to price hikes of between 80 percent and 97 percent with China’s Baosteel for iron ore contracts, but this year is widely expected to bring an end to years of escalating price rises.
Mark Pervan, head of commodity research at ANZ Bank, said the worst-case scenario would be for iron ore contracts with the major Asian steelmaking companies to drop by 50 percent.
Pervan said while the US has been a major drag on commodity markets, this had in the past been more than offset by strong Chinese growth.
“That’s going to change,” he said. “What you’ve got now is an even weaker global demand story plus you don’t have a strong offset from China, and that’s why you’ve got the prices where they are today. And potentially they could go a little lower if we start to see further cracks in the Chinese growth outlook.”
Resources analyst at DJ Carmichael in Perth, James Wilson, said the most important factor in resource prices would be China, which he said had “turned into a lifeline pretty much” for Australian export commodities.
“A lot will depend on GDP data coming out of China,” he said. “Are they going to be going down to 7 percent GDP growth? Are they going to surprise on the upside?”
Wilson would not go as far as to say Australia’s mining boom was winding down, but he said there would be serious challenges this year.
“I would say it’s probably stalling,” he said. “The downturn in demand wasn’t because of a global souring of sentiment towards metals, it was because the entire US went completely bankrupt overnight.”
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