Iron ore prices are slated to drop from their higher-than-expected prices in coming months, but super balances will continue to receive a “free kick” from it for a while yet.
The price of iron ore skyrocketed in January after Brazilian mining company Vale – a major supplier of iron ore to the global market – was forced to halt its operations following the collapse of a trailing dam that killed more than 300 people and led to more than 3000 evacuations from a nearby town.
More recently, the price has broken above $US100 ($144) a tonne – its highest level in five years and well above the $US55 a tonne price used by government in its 2019 federal budget.
Industry Superannuation Australia chief economist Stephen Anthony said that has been great news for super members, as the additional money flows back into the economy and into people’s nominal incomes.
“It’s a bit of a free kick,” he said.
However, on Thursday Vale was given the green light to recommence iron ore processing at its Brucutu mine; one of several factors that CommSec markets analyst James Tao told The New Daily is expected to lower the price of ore.
“There’s always the case that what goes up must come down,” he said.
“The expectation is that the price isn’t going to stay where it is forever.”
Mr Anthony agreed, and said the price is likely to ease back to $US75 a tonne in three to six months, but that reduction is not likely to hurt super returns.
“When the price comes off we would expect prices to still remain quite high, around $US75 a tonne which is still a great price. It’s just not as big a free kick as we’ve had,” he said.
“That’s still quite high relative to the long-term average, so what that means is we’re still earning a good wage off the dirt we’re digging up, and that does tend to feed back through to the rest of the economy.”
Mining stocks take a hit
The strong price of iron ore did little to protect mining company stock prices on Thursday after leading Australian producer Rio Tinto revealed a number of “operational challenges” at its Pilbara mine resulted in “a higher proportion of certain lower-grade products”, prompting the company to reduce its shipments for 2019.
Shares in the company dropped 4 per cent in response.
Fellow iron ore producers BHP and Fortescue Metals were similarly punished by investors, closing 0.32 per cent and 0.46 per cent lower respectively.
“Generally they move in sync – If one iron ore miner goes down the others will follow and it’s been a similar case today,” CommSec’s Mr Tao said.
Rio Tinto’s floundering market price was the largest weight on the overall market too, CommSec said, and according to Mr Tao, its effect on other mining companies was enough to push the market briefly into negative territory early in trading.
“The reason why such a handful of companies can really impact the broader market is just because of the size of them. BHP is one of the largest listed companies in Australia, worth about $120 billion, which is a fair portion of the ASX 200,” he said.
“Our market isn’t big enough in the way the US is where a single company doesn’t really affect the overall market.
“But here in Australia big miners, the big four banks and a few others are real drivers of the market because they form such a large chunk of it.”
However, strength in other sectors of the market helped push the ASX 200 up 0.59 per cent, hitting an 11½-year high.
The New Daily is owned by Industry Super Holdings