Iron Ore price may have jumped, but the big picture
offers less cause for confidence.
This month the news is good. A 6.7% jump resulting from news of approvals in Chinese Infrastructure projects. It’s enough to put the price back over $100 a tonne, which though well short of the $150 high, is at least over the recent $90 level.
There remains however, an inevitable truth to be faced. China’s economy is shifting. As the Chinese population starts to consume more of its own products, rather than relying on external markets for exports, its need for steel and the raw materials used to produce it, will drop and drop.
Steel futures in Shanghai are dropping as we speak. While China continues to overproduce steel, the $150bn in approved projects will not be enough to build confidence in future need. Only cuts in production at Chinese steel mills will stabilize the price.
But in a market that’s seriously fragmented who’s going to do that? Who’s going to compromise their market share? And what are the state run facilities going to do about the jobs it will cost? The answer is that everyone is going to hope for a solution somewhere else in the supply chain.
Today Fortescue will ask lenders to waive debt covenants. As the world’s fourth largest iron ore producer, the company is suffering severely from the weak demand in China, its largest market. Fortescue has avoided raising equity capital, hoping instead for a rebound in commodity prices.
Meanwhile, confusion reigns in India. In Goa, ‘serious illegalities and irregularities’ in mining operations have led to a freeze in production, as New Delhi continues to seek drops in exports to fulfill domestic need. India’s exports to China have dropped significantly – by 40% April - June.
So what does all this mean for the Australia mining job market? Time will tell, but the outlook is not immediately positive. It is the demand for minerals that has protected the Australian economy from the worst of the global financial crisis. But the fall in commodity prices, the closure of mines and - most significantly for engineers – the postponement and cancellation of expansion plans, will start to pull this protective blanket off the national economy.
The good news is that not everything is about mining projects. Demand for engineers on LNG projects remains strong and our clients have continued to seek talent for ongoing expansion. As one door closes another one opens.
But there is a truth to face here – China will not be the magical bodyguard of the Australian economy forever.