For what it's worth, I read the news today from Chinese steelmakers that 'winter is coming'. 'The Coal Trader' writes on Substack that he thinks 'we should expect China steel producers to begin cutting production' to save cash (their profits are below zero), which will allow for the glut to clear, and that the next steel cycle will begin in around 8-12 months...

https://strawman.com/forums/topic/9561#post-28397

https://www.bloomberg.com/news/articles/2024-08-15/iron-ore-hits-lowest-since-2022-as-mills-crisis-rattles-market [15-Aug-2024]

https://www.afr.com/markets/commodities/iron-ore-crash-threatens-chalmers-budget-surplus-hopes-20240815-p5k2l4 [15-Aug-2024]

Alex Gluyas, Markets reporter (AFR), Aug 15, 2024 – 2.06pm

Iron ore crash threatens Chalmers’ budget surplus hopes

The slump in iron ore prices threatens the federal government’s chances of delivering a third consecutive budget surplus, providing ammunition for the Coalition ahead of next year’s election.

Benchmark iron ore prices have sunk 3.6 per cent this week to $US95.25 a tonne, according to S&P Global’s Platts, spooked by a warning from Chinese steelmaker Baowu of a “harsh winter” ahead for the industry.

That extended the steelmaking ingredient’s plunge this year by more than 30 per cent to its lowest levels since November 2022. Futures in Singapore are down as much as 1.9 per cent to $US93.85 a tonne on Thursday, intensifying the sell-off in mining stocks.

The hot-rolling workshop at Baowu’s production facility in Shanghai. The steelmaker warned of a “harsh winter” ahead. Bloomberg

The warning comes after the Treasury forecasts in the new federal budget predicted iron ore prices to fall considerably in the next 12 months.

While the collapse in iron ore has weighed heavily on the sharemarket – BHP alone has tumbled more than 22 per cent this year – it is yet to be felt by the Australian government, due to its low-ball forecast in May that prices would be about $US60 to $US70 tonnes by March next year.

Treasury analysis shows that a $US10 a tonne drop in prices below its forecasts inflicts a $2.4 billion hit to revenue in 2024-25 and $4.5 billion over two years.

And with the price of Australia’s key export sinking rapidly, Westpac projects the gap between spot prices and Treasury forecasts may reach $US25 a tonne by the end of December, threatening the government’s hopes of delivering a budget surplus in the same year as the election.

The Albanese government in May forecast a deficit of $28.3 billion for 2024-25, with Treasurer Jim Chalmers insisting spending pressures were intensifying and not committing to delivering a third surplus.

“The problem for the government is they’ve been able to take the upside surprise in iron ore prices and its contribution to the budget surplus as strengthening their economic management credentials against the Coalition, who have been running deficits for many years,” said AMP’s chief economist Shane Oliver.

“That will obviously become harder the further the iron ore price falls, so there would be hope within the government that while they’ve projected a deficit this year, they can project another surplus.”

‘Longer, colder and more difficult’

Panic has swept across iron ore markets this week after Baowu, the world’s largest steelmaker, said the downturn in the industry would be “longer, colder and more difficult to endure than we expected”.

Baowu chairman Hu Wangming, who made the comments at the company’s half-year meeting, said the challenge could be worse than the “major traumas” in 2008 and 2015. At the end of 2015, iron ore prices traded below $US40 a tonne.

While analysts do not expect prices to fall nearly that low, they warn that conditions in global steel markets are as bad as they have been in years, with many mills unprofitable and unwilling to buy iron ore.

Indeed, the average steel mill margins over the past year have been more negative than any other 12-month period since at least November 2016, according to Commonwealth Bank commodity analyst Vivek Dhar.

Steel production is also lower, down 9 per cent in July on both the month and year to 82.9 million tonnes, the lowest figure reported in 2024, the National Bureau of Statistics of China reported on Thursday. That leaves the total over the first seven months at 613.7 million tonnes, 2.2 per cent off last year’s pace.

The key drag on China’s steel demand remains its property sector, which accounts for about 30 per cent of the country’s consumption of the material.

While Chinese policymakers announced a funding package of 500 billion yuan ($106 billion) in May, that is well short of what is required, with markets estimating that spending closer to 2.5 trillion to 7 trillion yuan is required to absorb China’s excess housing inventory.

And with no further support announced at China’s Third Plenum and Politburo meetings, hopes are fading that Beijing will be able to solve the property crisis.

Bear market to intensify

CBA believes iron ore prices could drop to as low as $US90 a tonne given how negative steel mill margins have become.

“Our concern is that the speed that iron ore prices can fall will likely be driven by the surprising deterioration in China’s near-term steel demand,”

Mr Dhar said.

Morgans estimates there is 80 million tonnes of iron ore supply that needs to trade between $US80 and $US100 a tonne for the supplier to break even.

While prices would need to fall to those levels on a sustained basis to hit supply, this bank of higher-cost supply was still “very much required by the market”, the broker’s deputy head of research, Adrian Prendergast, said.

He added that the long-term investment case for Australia’s major miners remained safe, given BHP, Rio Tinto and Fortescue’s cash breakeven levels still ranged between $US28 and $US45 a tonne.

Westpac remains particularly bearish on iron ore and is projecting that prices will end the year at $US85 a tonne.

“This crash was always going to happen,” said Robert Rennie, head of commodity and carbon strategy at Westpac. “We are finally starting to see traders pay attention to the carnage that’s going on in the steel market.”

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@Bear77 Bear did you do an EVN write-up? i was waiting for it. awful big talk by the team on FY25! lets hope their not dreaming :)

To be honest @Solvetheriddle , I haven't read the EVN releases or watched any MoM podcast stuff for a couple of days as I have been mostly busy with other things offline; I've just scanned their daily newsletter for headlines, such as the iron ore price slump, but regarding Evolution Mining specifically, while I do try to keep myself across the Aussie gold sector, I don't follow Evolution Mining closely despite them being regarded as the second largest Aussie HQ'd and ASX-listed gold producer we have, and that's because of how much copper they produce and how they use the copper sales as byproduct credits to reduce their AISC (all-in sustaining costs) - which are actually negative at the two mines that produce the most copper - Northparkes and Ernest Henry - so they claim that they are producing gold at those two mines for LESS than $0/ounce because the copper sales covers the cost of mining and processing both the copper and the gold.

While that could be viewed as a good thing, it also means they are actually a copper and gold producer not just a gold producer and the prices of both copper and gold affect their earnings, and the price of copper certainly affects their costs, so I don't regard them as an easy apples vs apples comparison to other Australian gold producers because of the way the copper production masks the real costs of their gold production.

Good if you're bullish on both copper and gold of course, but I'm currently neutral on copper shorter term, and bullish longer term in terms of demand, but I don't really have much of an understanding around future supply scenarios with copper, so I'm wary of having copper exposure at this point until I think I understand the supply side a bit more.

EVN do have a couple of mines with high costs - higher than most of their competitors - but those other two copper/gold mines (Ernest Henry and Northparkes, which both produce much more copper than gold) with their negative AISC brings the Group AISC (overall company costs) down to make them look like a low cost producer, and they really aren't - except at those two mines that also produce copper.

So I haven't held any EVN since early last year or the year before and I don't really follow them now because I don't consider them a pure-play gold producer, but rather a copper/gold producer. I did briefly note that their results were considered above consensus, and they apparently were very bullish on their outlook, but beyond that I haven't looked at the detail. I'll post something if and when I do have a look at those details.

@Bear77 sorry my mistake i thought you followed EVN closely.

No need to apologise @Solvetheriddle - I did follow them a couple of years ago - and held them too - but I lost interest when they went into Northparkes because that was their second mine that produced much more copper than gold, so I no longer regarded them as a pure-play gold miner.

Normally I would be up-to-date with their report regardless of my reduced interests levels in them specifically, but I've got a bit on at the moment. I'll catch up soon.