Earlier this year Iron ore price today had the largest one day move ever. It rose nearly 20% in a single day and took the year to date gains in the price to more than 40%. Since then it has had a minor pull back.
The price chart below shows the commodity year to date. It has been a silent rally where most of the attention of the market has been focused on oil.
Before the huge one day gain in the price, it has essentially fell off the radar of most traders. We were cautious on the move as we are conscious of the market structure of iron ore trading.
Long Term Iron Ore Price
The commodity has been traded on a daily basis for only 5 years where previous pricing mechanism was conducted on a quarterly average and annual basis. Dalian Iron Ore Futures is one of the most commonly quoted price for iron ore.
Much has been written on perplex nature of what is driving the jump in the price when the underlying steel demand in China is still weak. The danger is the current steady flow of credit becomes a flood. Real estate prices in Tier 1 city has already recovered.
The rise in the price seen within the multi year context shows that it has yet to breach the downtrend line.
Iron Ore impact on Australian Dollar
The best thing for bulls is for a slight pull back and volume confirmation. Then we will know if the commodity has really bottomed.
We are keenly watching in the Aussie Dollar. The AUD did not move immediately following the price jump but it did breach 0.75 cents in the following days.
Chart below shows the total iron ore export volume and the amount exported to China.
Australia Iron Ore Exports
What is clear is all the growth in iron ore production since 2008 has been absorbed by China. Therefore the future price of the commodity has important implication for the Australian dollar and this will be dependent on China manage a soft landing in its current economic slowdown.
On a cross rate basis, shorting NZD to AUD looks really interest here. The recovery in base metal and bulk commodities and corresponding weakness in soft commodities means that a usual stasis rate like AUD NZD would move really fast.
Iron Ore Shares
Given steel is a key ingredient and proxy for Chinese growth. A sustained recovery in the price and demand for the commodity would be positive for Australia. While smaller caps has rallied harder and provided greater gains. Just remember, while you can double or even triple your gains. If you are wrong, the stock like FMG and BCI are worth zero.
We prefer strong cashflow driven diversified miners. Our key exposure is through the Rio Tinto equity. Rio being the world lowest cost producer means that for it to lose money on iron ore. Everyone is counting down to bankruptcy.
While the year to date gains are impressive. Spot iron ore price on a longer price graph shows the severity of the fall. Nothing goes up forever, nothing goes down forever. A dead cat bounce is to be expected. Only time will tell if this rally will last.