A slowdown in China’s property market is just a part of the story impacting the price of Australia’s top commodity export. A big contributor is the increase in the supply of iron ore given the completion of new mines. In this article, we explore the key factors impacting the Australian mining industry.

1. Price of iron ore has fallen dramatically

The price of the steel-making ingredient iron ore has been on a downward trend since 2011. The impact of this for Australian share investors is that a decline in commodity prices negatively impacts the profits of miners and adversely affects share prices.

2. China cools down

Concerns of inflated property prices have recently hit the headlines after a strong run up in prices and seemingly unceasing construction across China. The surge in prices and a threat to affordability saw Chinese policy makers implement measures to cool down property demand. This included controls such as limiting domestic housing purchases and raising down payment minimums. Another key factor in cooling the property market involved tightening monetary policy in China, which was aimed at slowing credit growth and lending for new properties.

China’s slowing economic growth is also a significant influence with some releases of economic data raising concerns that China’s economy may struggle to hit its +7.5% growth target in 2015. These factors translate into less ‘end-user’ demand for iron ore in China.

3. Significant ‘new supply’ is entering the market

To add to the complexity, there is a large amount of new supply of iron ore hitting the market provided by large miners such as BHP Billiton, Rio Tinto and Fortescue Metals as all the mining investment of the last few years has manifested in the completion of new mines. Less demand and more supply has driven a fall in the iron ore price and has weighed on the share prices of miners.

What does this mean for investors?

Large miners are better placed to weather suppressed commodity prices relative to smaller miners as they are better capitalised and have lower costs. An environment of depressed share prices for miners and balance sheet difficulties could set a backdrop for more mergers and acquisitions.

Corporate activity led by Chinese investors could be a support for many miners. For example, the last few weeks saw Chinese steel company Baosteel and Aurizon Operations offer a joint takeover to acquire 100% of the ordinary shares of Aquilla Resources.

The strength of balance sheets and average costs of production will be an important factor in determining the health and potential survival of miners.


About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

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