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The Black Swan to Australia’s rescue

4 April 2020

9:00 AM

4 April 2020

9:00 AM

Its borders are now closed for people, but definitely not for trade – nor for ‘Foreign nationals coming to China for necessary economic and trade activities’. Trade is the ‘open sesame’ to China’s cave. This and the relaxation of internal movement constraints (as the rate of infection declines) means that China really is open for business once again. China’s dramatic table-turning last week on the rest of the world’s ban on visitors from the birthplace of the coronavirus pandemic did not represent Beijing ‘putting up the shutters’. Rather it is protecting the quickening pace of Chinese internal economic recovery from a return from overseas of the virus it had recklessly exported.

China being open for business is not only good news for Australian exports, particularly iron ore, but even better news for the cash-strapped Morrison government wondering how it is to pay for the multi-billion dollar stimulus packages needed to offset the economic damage from Australia’s imported coronavirus pandemic.

There are widespread expectations that, in order to reach its GDP growth targets, the Chinese government will spend huge sums on infrastructure and other projects in the second half of 2020 (even if many of them are of questionable merit). These will need steel. In any event, Moody’s has forecast that ‘The plateauing of the number of new infections in China will allow for a normalisation of economic activity in the second quarter of 2020’. It sees signs of increased local demand with domestic stocks of steel products falling for the first time this year while iron ore imports stockpiled at Chinese ports in mid-March fell to their lowest for seven months.

Australia’s major miners expect China’s demand for iron ore to remain strong despite coronavirus, with domestic supply disruptions and potential stimulus measures supporting its price. BHP recently expressed confidence about its exports while a bullish Fortescue Metals Group expects exports to remain in line with its 2020 guidelines, asserting that big Chinese steel companies were still producing and buying more iron ore from Australian suppliers. ‘Most of us are running at full pelt,’ according to Fortescue chief executive Elizabeth Gaines. And for the longer term, she noted that iron ore sales are far less linked to the health of the manufacturing and export industries in China which were hit by the US-China trade war. ‘China is still on this path of urbanisation,’ Ms Gaines said. ‘It has still got a long way to go.’

And for investors in iron ore stocks, of which I am one, looking glumly at their slashed market prices, the falling Australian dollar provides some salve. The eight US cents drop this year from 70 US cents to below 62 US cents to the $A not only adds to mining company $A earnings (as exports are in US dollars), but to dividends, too, for those expressed in US currency. Broker Ord Minnett reckons the eight cent drop adds an extra $US176 million to Fortescue’s forecast current year operating earnings, an extra $US960 to BHP’s and $US 600 million to Rio Tinto’s. And the halving of oil prices this year is bringing substantial benefits by way of significant cost relief for Pilbara iron ore operations, where about 15 per cent of costs relate to fuel and energy, mainly diesel. For Fortescue, Ords estimates an earnings benefit of $US170 million, for Rio Tinto of $US270 million and for BHP of $US250million (but offset by lower earnings from its oil division).

As stock markets have crashed around the world, the coronavirus pandemic has been described as a ‘Black Swan’ – ‘a rare, unpredictable event with serious and unavoidable effects’. As Ben Zimmer outlined in last weekend’s Australian, the expression goes back to the second-century Roman poet Juvenal who, believing all swans were white (as in Europe), despairingly described finding a wife with the right set of virtues to be as difficult as finding ‘a bird as rare upon the earth as a black swan’.

Ironically, our best chance of restoring Australia’s export health (via iron ore exports to a recovering China) is the black swan mining state of Western Australia; a bird of a different feather.

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