Amid oversupply concerns and weaker demand in China due to the struggling real estate and property market, iron ore spot markets continue to extend the slide, sending the benchmark price tumbling to closer to the lowest level in the past 18 months.
The price of Iron Ore 62% Fe, CFR China (TSI) dropped to the US $92 a tonne level, the lowest level since May 28, 2020 when Covid-19 was just emerging outside China.
With all the hoo-ha over wine and cheese, Australia sends around 85 per cent of its most valuable export – iron ore to China.
China’s earlier increased demand was linked to its coronavirus stimulus packages as it targeted steel-intensive projects like rail, airports, bridges, and ports to keep the economy going. However, the construction sector and oversupply of housing, more supplies, especially huge supply from Brazil have created low demand for the iron ore in China and globally.
While Australia is hugely dependent on the iron ore export revenue, the unfolding situation will put the Reserve Bank of Australia in a bad position, specially amid the policy tightening in the US.
If the RBA raises its cash rate, this will cause chaos in the overinflated property market and hit the economy hard.
If the RBA holds, rising interest rate in the US will trigger a massive capital outflow from Australia, and local lenders have to follow the US to raise the rate anyway.
Given the dilemma, the RBA will likely try to choose the lesser of two evils, and end its money printing earlier, and consider raising its benchmark rate soon. The main difficulty will be how to prevent a crash in the property market hanging off a big hot air balloon.
Bond purchase under the unconventional policy of quantitative easing, or QE is all about manipulating interest rates which acts in a similar way to interest cuts without actually reducing the nominal rate.
When the RBA buys government bonds, money is flowing from the central bank to individual banks in the economy, increasing the supply of money in circulation.
Thats why it is sometimes called printing money to intentionally increase prices when inflation is “considered” low (RBA governor Philip Lowe’s outdated view of inflation and obsession with it is not a well-kept secret).