One key aspect that was not addressed sufficiently in the article Iron ore’s harder times is the sensitivity iron ore companies have to price as a result of their cost position. If we say the price is 100 and the cost position 50, then a 10% price reduction affects profit by 20% (margin drops from 50 to 40). However, if the cost position is, say, 80, then the same price reduction halves profit. The large miners, BHP and Rio, have large, world-class mines with high grades and low cost. As iron ore prices rose strongly in the last decade, many new mining companies sprung up by picking up the crumbs in the Pilbara. They are now the ones who are hurting first and most.
– T Girgens
Buy now, pay later
Alan Kohler’s weekend briefing decrying the current fad of instant gratification is right on the money, and I well recall a moment in time when this began in Australian society. The first television money guru I remember was Bruce Bond. He answered questions from a studio audience and I clearly remember his reply to the usual complaint from a young couple in about 1971. "As a young couple we simply cannot afford to buy a house; we can't get into the market." "Rubbish," he roared. "You can't afford to buy your DREAM home but you can afford a house." He went on to give a perfectly reasonable explanation of how to achieve this goal by first removing the concept that a person's first home should be the dream mansion. I think your article is affirmation that the concept is lost today. Australian society today does not require such a call to arms (or cheap instant money) as they have long since learnt the lesson of buy now, pay later '¦ maybe.
– A Lewis
I am wondering if any of the Eureka Report team have any recent, thoroughly researched investment reports from credible sources that they can share on the status of China's economic development, and particularly its demand for iron ore. An example of what I am looking for: fundamentals – Japan, arguably the last Asian tiger to transition from subsistence farmer to manufacturing powerhouse – iron consumption was Xkg per capita post war, rose to Ykg per capita at the peak of the 1970s boom, and then went into a long term decline to Zkg per capita. China's is currently Akg per capita. Surely someone has information – real credible research and “go-see”-based reporting – that supports decision-making over relevant time frames for China?
– S Jelaca
Michael Feller’s response: I've written about this topic a number of times, looking at whether China's boom is sustainable. Unfortunately, I’m very much in the bear camp, at least as far as the sustainability of China’s fixed-asset investment growth model is concerned. Here are some articles I’ve written on this over the past year:
- China's false dawn.
- Enter the dragon.
- China risks out of the shadows.
- Nouveau riche get theirs.
- When worlds collide.
- Pincer closes on China.
- China at the precipice.
To read this week’s letters, click here.