Australian Iron Ore Plunge, High Losses, Questionable Gold Reserves
Australia, with its vast land and sparse population, is rich in mineral resources such as iron ore. For many years, it has maintained economic growth by exporting mineral resources and agricultural products. For instance, Australia's Minister of Resources recently stated that iron ore has become the first commodity in Australia to break through the annual export threshold of 100 billion Australian dollars. However, recently, Australia's aforementioned advantageous industries have fallen into difficulties, especially the sharp decline in iron ore revenue, which is one of the main sources of income for the country.
The latest development is that iron ore futures fell by more than 22% in the week of September 15th, and have dropped by more than half since their peak in May this year. The American financial website Zerohedge analyzed that this plummet pattern is also the worst single-week performance in the history of iron ore futures.
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Data shows that iron ore is becoming one of the worst-performing major commodities, and the intensified selling has led to its price volatility rising to the highest level in five years. Obviously, this is not good news for the Australian economy, which is highly dependent on iron ore exports.
The Australian Commonwealth and the Reserve Bank of Australia have begun to prepare for the decline in iron ore prices, setting the benchmark price scenario for iron ore at $55 by the end of March next year in the budget documents. Australian Treasurer Josh Frydenberg once referred to this as a "very conservative" assumption. In other words, the Australian economy may have already sensed the iron ore crisis and felt that Australian iron ore may face greater difficulties.
It is worth noting that recently, the stock prices of Australian iron ore companies, such as BHP Billiton, have also fallen sharply. For example, on September 17th, BHP Billiton's US stock fell by more than 6%, and its London stock price fell by more than 5%. UBS predicted in its latest research report on September 17th that as the market shifts to oversupply, the price of iron ore will continue to decline, and the speed of the decline will be "faster than expected". This further confirms the reason for the Australian economy's concern about the iron ore crisis.
Data shows that from January to July this year, iron ore accounted for more than 40% of Australia's export revenue. It is estimated that for every $10 decline in iron ore prices, Australia's fiscal revenue will lose between 3 billion and 3.5 billion Australian dollars. It is worth mentioning that in the past, 84% of Australia's iron ore exports were exported to the Chinese market. Australian media analysis believes that when Chinese buyers reduce their purchases of Australian iron ore, it will increase the possibility of a recession in the Australian economy.
Data shows that from early August to the 20th, domestic iron ore futures main contracts fell by more than 30%, and spot prices also continued to decline, with transaction volumes plummeting by nearly 80%. Port iron ore inventory has accumulated, and many ports have reached a saturation state in terms of iron ore storage. At the same time, as the industrial chain continues to upgrade, the overcapacity of steel production has also led to a decrease in demand and purchases of Australian iron ore.
A week ago, it was reported that Chinese buyers, who purchase two-thirds of the world's iron ore, are becoming more and more particular about the grade of iron ore. To cater to Chinese enterprises, Australian iron ore companies had planned to build new mines. This indicates that Australian iron ore companies have long depended on Chinese buyers. Obviously, when market purchases decrease, it is inevitable that Australian iron ore companies will suffer. At the same time, Australian companies are gradually losing control over the pricing power of iron ore.
Since 2019, Australian and Brazilian iron ore companies have introduced futures pricing and transactions settled in yuan for iron ore. Behind this is the fact that the international trading of iron ore futures in yuan has been launched for nearly three years, and global investors have been continuously increasing their investment in iron ore futures in yuan. Australian iron ore companies have to make new currency choices. In fact, the sharp decline and difficulties faced by Australian iron ore are just the tip of the iceberg of the heavy blow to Australia's resource industry and the loss of valuable resources.
Taking Australian coal as another example, according to Coronado Global Resources, a mining company listed in Australia, after Chinese buyers stopped importing Australian coal, a large amount of coal from other global markets entered the Chinese market, including American coal. In addition, Don Lindsay, the CEO of Canada's Teck Resources, said a few weeks ago that he hopes the company's coal can increase exports and replace Australian coal.Not only that, but Australia's other major advantage industry, agricultural product exports, has also suffered heavy losses. This includes a variety of goods such as Australian beef, cotton, wine, and seafood, all of which have seen orders canceled and severe unsold situations. For instance, Tony Battaglene, the CEO of Australian Grape and Wine Association, stated a few weeks ago that against the backdrop of canceled wine orders in Australia, an increasing number of grapes and wines in the country may face nowhere to go. For many Australian grape growers and wine merchants, this is a catastrophic blow, resulting in heavy losses.
The progress of these events indicates that several of Australia's major advantage industries are falling into difficulties and even facing a cliff-like plummet. However, the situation seems far from over. According to a Bloomberg report, in addition to the slowdown in global economic growth and trade barriers, Australia's economy is also facing a debt predicament.
Data compiled by the Reserve Bank of Australia shows that Australia's household debt-to-income ratio has soared from 67% in the 1990s to 189%. That is to say, for every 1 Australian dollar of income, an average Australian household generates 1.89 Australian dollars of debt, clearly in a state of overspending. This is a footnote to Australia's economy, which, in the long-term context of relying on the sale of resources, has been complacent and heavily indebted.
However, when the sale of resources is severely hindered, and the expectation of monetary tightening by the Federal Reserve increases, the acceleration of U.S. dollar capital withdrawal from Australia seems inevitable. This exacerbates the Australian economy. At this time, it appears that Australia's gold reserves have been misappropriated by the Federal Reserve, with their whereabouts in question.
Although Australia is one of the world's largest gold producers (producing about 300 tons of gold per year), Australia's gold reserves only hold 68.7 tons (4.9% of its foreign exchange reserves). Almost all of these gold reserves are stored in the Bank of England in the UK and the underground vaults of the Federal Reserve. Gold expert Egon von Greyerz, who successfully predicted quantitative easing, analyzed that at least 11 tons of the aforementioned Australian gold reserves may have been misappropriated. However, the Reserve Bank of Australia has remained almost silent on this issue, seemingly afraid to repatriate gold from the Federal Reserve. This makes the Australian economy even more passive.
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