Can the iron ore prosperity continue?

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A perfect storm in iron-ore markets has catapulted Gina Reinhart and Andrew ‘Twiggy’ Forest into the top two positions on the Australian Financial Review’s 2020 Rich List, but could their success force China to curtail the dominance of Australia’s biggest contributor to GDP? At Acorn we think it could, and what’s more we also think this seismic change is already under way.

To listen to Rick Squire and Karina Bader’s thoughts on the current iron ore dynamics, click here for the audio interview or see below for a transcript of the conversation.

[00:00:01] Welcome to the Acorn Capital Market Insights where we’ll be sharing our views on particular thematics at the moment. And today I have Rick Squire and Karina Bader to talk about iron ore. So Karina with iron ore prices, they’ve experienced a stellar run for the last two years. What do you think is driving the strength in iron ore prices?

[00:00:22] Iron ore prices initially ran in 2019 on the back of supply disruptions from the Samarco tailings dam tragedy. Those supply disruptions were further compounded by the impact of COVID-19 across Brazil coupled with continued demand out of China. These are the factors that have been the driver of strong iron ore prices over the past two years.

[00:00:44] So who has been the main beneficiaries of the strong iron ore prices?

[00:00:51] Australia as the largest iron ore producer on earth is the main beneficiary. The Australian Government through company taxes and record trade balances and then investors in iron ore producers who have benefited from strong share price performance and dividend returns over the past two years. Most notable beneficiaries are shareholders such as Gina Rinehart and Andrew Forrest who were named first and second place in the AFR 2020 Rich List.

[00:01:18] Karina noted that Australia has been a major beneficiary of this perfect storm for iron ore prices. Rick do you think that this can continue for the years to come?

[00:01:27] It’s certainly in the near term I think it can continue. But what we’re noting is that a number of commentators are highlighting the Strategic and Defence nightmare that this reliance on Australian iron ore has created for China. The reason for that is iron ore is used in steel production and is arguably China’s most important raw material. However the last two years has seen China now obtaining two thirds of its iron ore supply from Australia. Now regardless of Beijing’s relationship with Canberra the one or one of strategic risk management says such reliance on such an important commodity is an unacceptable risk.

[00:02:11] And with these risks do you think China may want a new source of iron ore that are outside of Australia and Brazil? Can they find a source that’s large enough to meet their demand?

[00:02:22] That’s a good question. I think it’s something that China is already working on. Guinea in West Africa contains more than 2 billion tonnes of iron ore resources at some of the highest average grades on Earth. The largest of their deposits Simandou was recently awarded to a Chinese controlled consortium with a large scale mining and shipping experience in Guinea. SMB Winning is planning to build a railway and deepwater port within the next five years. Once in operation, SMB Winning could significantly reduce China’s reliance on Australia’s iron ore. This will also put downward pressure on the iron ore price. I’ve been to Guinea and I’ve seen firsthand how SMB Winning has quickly and successfully started up its bauxite operations. One thing the Chinese are very good at is building infrastructure in difficult locations so the speed with which they can get Simandou into production should not be underestimated.

[00:03:22] I think the clock is ticking on the current iron ore boom and investors should be well aware of well.

[00:03:30] Thank you very much for your time Rick and Karina. You’ve definitely given the audience lots to think about and digest. I thank our listeners for tuning in and we hope to share more of these commentaries and insights in the months to come.

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