The caviar of iron ore

Delivered on By Justin Pyvis

Good morning! Tonight we’re going to be treated to a special, down-in-the-polls, pre-election federal budget. Which can only mean one thing:

ScoMo and Treasurer Josh Frydenberg will attempt to shovel as much borrowed cash out the door as is humanly possible in an attempt to buy themselves another few years in government.

Will more deficit spending overheat an already red-hot economy, force up interest rates more than otherwise, elevate the risk of an asset price bust, recession and ultimately create higher debt repayments for future generations? Yes.

But will it stop them from doing it? Hell no, there’s an election to win!

The Libs will spend like there's no tomorrow in tonight's budget, because politically there may not be one otherwise.
The Libs will spend like there's no tomorrow in tonight's budget, because politically there may not be one otherwise. Source

Reading the tea leaves

Daily % change

AUD/USD

74.9

-0.3%

AUD/CNY

4.77

-0.2%

AU Bond

2.84

-1.2%

US Bond

2.48

-0.6%

ASX200

7,412

+0.1%

S&P500

4,576

+0.7%

Brent (bbl)

109.6

-9.2%

Gold (oz)

1,921

-1.7%

Iron ore (t)

153.9

+0.5%

Bitcoin

47,819

+2.1%

Ethereum

3,403

+3.4%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 finished 0.71% higher as the surge in Treasury yields took a breather, helping to boost tech stocks. A notable gainer was Tesla, which added 8.0% after announcing plans for another stock split, electing to pay shareholders a dividend in stock rather than cash.

The price of Brent crude oil plunged nearly -10% due to the lockdown in Shanghai, which has a population of over 25 million people. China is the world’s largest importer of oil.

Locally, the ASX200 gained 0.08% to hit a 10-week high thanks to – you guessed it – the materials sector, which added 1.29% on the back of stronger commodity prices, particularly iron ore.

Elsewhere in the region the Bank of Japan offered to buy unlimited amounts of 10-year Japanese government bonds at 0.25%, after it reached a six-year high of 0.245% in early trade. The yen promptly fell over -1.0% against the US dollar and now sits at a 6-year low against the greenback.

Government bonds are on track for their worst year since 1949, as investors dump them in the expectation that inflation will be persistent, forcing up interest rates.

Bureaucrats at the Reserve Bank of Australia got into the speculation game last year and bought a total of about $A355 billion worth of Australian government bonds at what was probably the top of the market. Whoops. 😬


Food for thought

The Simandou project will require a new 650km railway and a deep-water port before it can ship any iron ore.
The Simandou project will require a new 650km railway and a deep-water port before it can ship any iron ore. Source

Guinea’s military junta government signed a deal yesterday with Australia’s Rio Tinto and a consortium to develop the giant Simandou iron ore project, dubbed the “caviar of iron ore” due to its high grade (>65% Fe), with first production expected by 2025.

The agreement comes just two weeks after that same government “ordered the cessation of all activity on the ground pending the answers to questions posed to various actors and the clarification of the operational mode by which the interests of Guinea will be preserved”.

The project has been touted for decades (Rio Tinto was granted its first exploration licence for the area in 1997) but never got off the ground due to the enormous capital costs – Guinea’s government will not permit the use of the existing rail line and port in Libera (see image above) – and near-constant political instability.

Assuming Guinea remains politically stable – a big assumption – a fully functional Simandou certainly poses problems for Australia, given that it will be capable of shipping up to 100-200 million tonnes of high-grade iron ore each year into a seaborne market currently dominated by Australia (>800 million tonnes) and Brazil (>300 million tonnes).

Iron ore mining companies make up a large part of the Australian share market – BHP, FMG and RIO are all in the top 10 by market capitalisation (RIO drifts in and out due to its dual listed status) – and iron ore exports generate hundreds of billions of dollars for all levels of Australian governments each year (via company and income tax, royalties and payroll tax, and GST).

An operational Simandou won’t kill the Australian iron ore miners or those revenue streams, given its cost of producing and shipping a tonne of iron ore to China will be at least double what it is from Australia. But it would certainly have a negative effect on price, assuming there’s no commensurate increase in demand to offset the new supply.


Chewing the fat


Bits and bytes

👊 Actor Will Smith stormed onto the stage at the Oscars, physically assaulted host Chris Rock and yelled “Keep my wife’s name out your f—king mouth,” after the latter cracked a joke about Smith’s wife Jada.

🚆 Tonight’s federal budget will include an additional $A3.3 billion for infrastructure projects in NSW, “including $A1 billion for a faster rail line between Sydney and Newcastle”.

💸 WA Premier Mark McGowan slammed “the governments of NSW, Victoria, South Australia and Tasmania”, who “think that WA is some sort of benevolent uncle who bails them out when they overspend”.

🤒 Victoria’s Premier Daniel Andrews tested positive for COVID-19 and will stand down from his role while he isolates for the next week.

✈️ Qantas will fly non-stop between Melbourne and Dallas from December 2022, taking 15 hours, 45 minutes outbound and 17 hours, 25 minutes on return.

📑 US President Joe Biden unveiled his latest budget which includes a $US1.3 trillion cut that Biden claimed would be “the largest one-year reduction in the deficit in US history”.

🔌 Expect to see more of this: A Canadian man “was slapped with an $80 fine for charging his electric vehicle at a wall outlet in the Central City mall parking lot”.

🧑‍🤝‍🧑 That explains it. A South Korean doctor claimed that “adults who have not yet been infected with COVID-19 are those who have interpersonal problems”.

⚡ ExxonMobil, the largest oil and gas producer in the US, “is diverting natural gas that would otherwise be burned off into generators… to power shipping containers full bitcoin miners”.

🤔 How dare she! Indian police arrested a 25-year-old woman for posting the WhatsApp status “May God bless every nation with peace, unity and harmony,” on Pakistan’s Republic Day.

🌞 The Solar Orbiter recently captured “the highest resolution image of the Sun’s full disc and outer atmosphere, the corona, ever taken”, along with “the first full Sun image of its kind in 50 years, and by far the best one”.

🌓 The head of Ukraine’s Defence Intelligence Agency claimed that Putin “will try to impose a dividing line between the unoccupied and occupied regions of our country. In fact, it is an attempt to create North and South Korea in Ukraine”.

⚗️ Billionaire Russian Roman Abramovich “suffered symptoms of suspected poisoning”, along with two Ukrainian peace negotiators, at peace talks on the Ukraine-Belarus border earlier this month.