1 00:00:05,820 --> 00:00:08,670 Sean Aylmer: Welcome to the FEAR & GREED Business Interview. I'm Sean Aylmer. 2 00:00:08,940 --> 00:00:11,728 Sean Aylmer: All the talk and commodities right now is about iron 3 00:00:11,730 --> 00:00:14,549 Sean Aylmer: ore and maybe copper as well. But iron ore spot 4 00:00:14,549 --> 00:00:19,559 Sean Aylmer: prices fell below US $ 100 a ton over the past 24/ 36 5 00:00:19,560 --> 00:00:23,040 Sean Aylmer: hours before rebounding a bit. Of course, this has huge 6 00:00:23,040 --> 00:00:26,040 Sean Aylmer: significance for Australian miners and our economy because it makes 7 00:00:26,040 --> 00:00:29,340 Sean Aylmer: up such a large portion of our exports. Vivek Dhar 8 00:00:29,400 --> 00:00:32,729 Sean Aylmer: is the director of Mining and Energy Commodities Research at 9 00:00:32,729 --> 00:00:35,939 Sean Aylmer: Commonwealth Bank. Vivek, you're almost a regular on FEAR & GREED. 10 00:00:35,969 --> 00:00:36,598 Sean Aylmer: Welcome back. 11 00:00:37,170 --> 00:00:37,650 Vivek Dhar: Thank you. 12 00:00:38,430 --> 00:00:40,199 Sean Aylmer: All eyes on China right now, I suppose. 13 00:00:40,650 --> 00:00:43,019 Vivek Dhar: Yeah. Look, in terms of what's happened with iron ore 14 00:00:43,019 --> 00:00:46,859 Vivek Dhar: prices... We have certainly seen prices descend. It started this 15 00:00:46,860 --> 00:00:50,460 Vivek Dhar: year just north of 140. Now, we have tested that $ 16 00:00:50,460 --> 00:00:53,789 Vivek Dhar: 100 a ton mark. Spot prices are still just above 17 00:00:53,789 --> 00:00:56,190 Vivek Dhar: it, but, as you said, it's very much nearing that 18 00:00:56,190 --> 00:01:00,690 Vivek Dhar: level. Really, what's driven it has been Chinese demand concerns. 19 00:01:01,170 --> 00:01:04,140 Vivek Dhar: It has really pressed on steel mill margins in China. 20 00:01:04,679 --> 00:01:06,869 Vivek Dhar: So long as we have that pressure point, particularly from 21 00:01:06,870 --> 00:01:11,098 Vivek Dhar: China's property sector, that's really what's caused this fall so 22 00:01:11,100 --> 00:01:11,819 Vivek Dhar: far in iron ore. 23 00:01:12,539 --> 00:01:15,720 Sean Aylmer: Can we just take a step deeper into that? What 24 00:01:15,720 --> 00:01:18,930 Sean Aylmer: you just said? The steel mills are the biggest buyers 25 00:01:18,930 --> 00:01:21,330 Sean Aylmer: of iron ore in the world. The Chinese steel mills. 26 00:01:21,780 --> 00:01:25,529 Sean Aylmer: They're creating steel for the residential property market primarily. That's 27 00:01:25,530 --> 00:01:26,640 Sean Aylmer: a question, not a statement. 28 00:01:27,299 --> 00:01:30,990 Vivek Dhar: Look, the property construction side accounts for about 30 to 29 00:01:30,990 --> 00:01:35,850 Vivek Dhar: 35% of China's steel consumption. Then, your infrastructure side is 30 00:01:35,850 --> 00:01:41,010 Vivek Dhar: about 25 to 30%. When we really map China's steel consumption, it 31 00:01:41,010 --> 00:01:43,979 Vivek Dhar: is basically thinking about what is property going to do 32 00:01:44,219 --> 00:01:46,709 Vivek Dhar: and what is infrastructure going to do. That really is 33 00:01:46,709 --> 00:01:48,749 Vivek Dhar: how we sum up the China demand. 34 00:01:50,580 --> 00:01:53,130 Sean Aylmer: The problem at the moment is certainly... and on the 35 00:01:53,340 --> 00:01:58,710 Sean Aylmer: property market at least, there's been an oversupply in recent 36 00:01:58,710 --> 00:02:01,079 Sean Aylmer: decades or the last decade or so. We're just not 37 00:02:01,080 --> 00:02:05,160 Sean Aylmer: expecting to see the same demand or building demand over 38 00:02:05,160 --> 00:02:06,540 Sean Aylmer: the next decade. Is that the story? 39 00:02:07,260 --> 00:02:10,590 Vivek Dhar: Look, it's probably a bit less of a long- term 40 00:02:10,590 --> 00:02:13,200 Vivek Dhar: picture and more short- term in terms of what's playing 41 00:02:13,200 --> 00:02:17,040 Vivek Dhar: out. This is very much a housing crisis. For the 42 00:02:17,040 --> 00:02:20,369 Vivek Dhar: last nine months to February, we've seen new home prices 43 00:02:20,370 --> 00:02:22,739 Vivek Dhar: in China descend. It's not looking like it's going to 44 00:02:22,740 --> 00:02:25,739 Vivek Dhar: improve. But on top of that, what has happened, particularly over 45 00:02:25,800 --> 00:02:29,279 Vivek Dhar: the last few years, has been the health of China's 46 00:02:29,280 --> 00:02:32,490 Vivek Dhar: property developer sector has been very, very weak. Now, this 47 00:02:32,490 --> 00:02:35,280 Vivek Dhar: is very much a vicious cycle. You can imagine if 48 00:02:35,280 --> 00:02:38,790 Vivek Dhar: you have new house prices falling and you have property 49 00:02:38,790 --> 00:02:42,090 Vivek Dhar: developer credit conditions becoming worse, they feed back on each 50 00:02:42,090 --> 00:02:45,388 Vivek Dhar: other. What it means is that you need policy intervention 51 00:02:45,389 --> 00:02:46,799 Vivek Dhar: to come in a big way. 52 00:02:47,220 --> 00:02:50,790 Sean Aylmer: The property sector is critical here, Vivek. I mean, is 53 00:02:50,790 --> 00:02:53,250 Sean Aylmer: it a situation where there's been an overbuild for the 54 00:02:53,250 --> 00:02:57,809 Sean Aylmer: last decade, and then it's going to take years to 55 00:02:57,809 --> 00:02:59,430 Sean Aylmer: sort that out, or what? 56 00:02:59,969 --> 00:03:03,060 Vivek Dhar: Look, the situation with China's property sector is actually more 57 00:03:03,060 --> 00:03:07,050 Vivek Dhar: to do what's happened effectively post- COVID. There has been 58 00:03:07,050 --> 00:03:09,630 Vivek Dhar: a slowdown over the last 10 years. There's no doubt 59 00:03:09,630 --> 00:03:12,389 Vivek Dhar: about it. But in terms of just how things have 60 00:03:12,389 --> 00:03:15,660 Vivek Dhar: deteriorated, you can see that in two ways. One is 61 00:03:15,750 --> 00:03:19,710 Vivek Dhar: new home property prices in China have declined for nine 62 00:03:19,710 --> 00:03:22,950 Vivek Dhar: consecutive months to February. Now, on top of that, what 63 00:03:22,950 --> 00:03:26,880 Vivek Dhar: we're seeing is the health of China's property developer sector 64 00:03:27,270 --> 00:03:31,138 Vivek Dhar: is also very weak. This is something that's both combining 65 00:03:31,139 --> 00:03:35,069 Vivek Dhar: in a vicious cycle to really push down pressure on 66 00:03:35,070 --> 00:03:38,430 Vivek Dhar: new property construction. This is really critical for steel. This is 67 00:03:38,430 --> 00:03:41,520 Vivek Dhar: the most steel- intensive component. To put into perspective just 68 00:03:41,520 --> 00:03:45,690 Vivek Dhar: how weak this element is, look, it was down 39% year- on- 69 00:03:45,690 --> 00:03:51,210 Vivek Dhar: year in 2022. It was down 21% last year. The 70 00:03:51,210 --> 00:03:54,569 Vivek Dhar: first two months of this year... It's down over 30% year- on- 71 00:03:54,570 --> 00:03:58,200 Vivek Dhar: year again. It's very much where the pain point is: 72 00:03:58,230 --> 00:04:00,570 Vivek Dhar: is new construction just has no incentive right now. 73 00:04:01,530 --> 00:04:04,320 Sean Aylmer: Can I also ask, with these steel mills... They talk 74 00:04:04,320 --> 00:04:07,889 Sean Aylmer: about their inventory checks in May. I'm not quite sure. 75 00:04:07,889 --> 00:04:09,180 Sean Aylmer: Can you explain what that is? 76 00:04:10,619 --> 00:04:13,380 Vivek Dhar: What you often see... It's often at the start of 77 00:04:13,380 --> 00:04:18,630 Vivek Dhar: the year. You'll see steel mills and inventory generally rise 78 00:04:18,630 --> 00:04:21,990 Vivek Dhar: as we go through the construction season, which is March 79 00:04:21,990 --> 00:04:26,039 Vivek Dhar: until October/ November. During this period, you start seeing a 80 00:04:26,040 --> 00:04:30,599 Vivek Dhar: fair bit of construction activity. We do see seasonal pickups. 81 00:04:31,620 --> 00:04:35,039 Vivek Dhar: Look, inventory is certainly one aspect to watch very closely. 82 00:04:35,760 --> 00:04:38,190 Vivek Dhar: But if you look at actual activity, I think that 83 00:04:38,190 --> 00:04:40,950 Vivek Dhar: gives you a better sense of just how that demand 84 00:04:40,950 --> 00:04:42,300 Vivek Dhar: is really struggling right now. 85 00:04:42,779 --> 00:04:44,638 Sean Aylmer: Stay with me, Vivek. We'll be back in a minute. 86 00:04:51,900 --> 00:04:55,620 Sean Aylmer: My guest this morning is Vivek Dhar, director of Mining and Energy Commodities 87 00:04:55,620 --> 00:04:59,219 Sean Aylmer: Research at Commonwealth Bank. What's it mean for the big 88 00:04:59,219 --> 00:05:02,099 Sean Aylmer: miners for the BHPs and Rio and Fortescue? I'm not 89 00:05:02,099 --> 00:05:05,639 Sean Aylmer: asking you to comment on specifically, and no investment advice 90 00:05:05,639 --> 00:05:08,640 Sean Aylmer: here, nothing like that. Just generally, what's that mean for the miners and 91 00:05:08,640 --> 00:05:10,530 Sean Aylmer: also for the Australian government and the budget? 92 00:05:10,920 --> 00:05:15,450 Vivek Dhar: Yeah. Look, in terms of the direct implication. It just 93 00:05:15,450 --> 00:05:18,209 Vivek Dhar: means you have lower margins. But it doesn't mean that 94 00:05:18,210 --> 00:05:22,350 Vivek Dhar: it's not very, very strong. The delivered costs... When we 95 00:05:22,350 --> 00:05:26,100 Vivek Dhar: talk about, say, Rio, BHP, Fortescue into China, we're talking 96 00:05:26,100 --> 00:05:31,200 Vivek Dhar: 30 to $35 a ton delivered into China. At these prices of $ 97 00:05:31,589 --> 00:05:35,909 Vivek Dhar: 100 a ton... They are still making enormous amount of 98 00:05:35,910 --> 00:05:40,199 Vivek Dhar: cash mid- fall. It's still very, very strong. I certainly 99 00:05:40,199 --> 00:05:43,079 Vivek Dhar: wouldn't be saying that it's negative if we talk about 100 00:05:43,080 --> 00:05:46,770 Vivek Dhar: any risk to mining activity. But when we then look 101 00:05:46,770 --> 00:05:50,039 Vivek Dhar: at, say, government projections and what they're expecting... Look, if 102 00:05:50,040 --> 00:05:54,420 Vivek Dhar: these spot prices remain for this financial year, we're talking 103 00:05:54,509 --> 00:05:57,928 Vivek Dhar: an upgrade in terms of the tax receipts for the 104 00:05:57,928 --> 00:06:03,419 Vivek Dhar: federal government of about 800 to 850 million. But you 105 00:06:03,420 --> 00:06:06,510 Vivek Dhar: then look at next financial year, if these spot prices 106 00:06:06,510 --> 00:06:10,259 Vivek Dhar: remain, we're talking about 1. 4 to 1. 5 billion in 107 00:06:10,260 --> 00:06:12,750 Vivek Dhar: terms of tax receipts. Now, these sound like big numbers. 108 00:06:13,139 --> 00:06:16,080 Vivek Dhar: But in terms of for the federal government, it's not 109 00:06:16,080 --> 00:06:19,919 Vivek Dhar: going to really move the dial. They have a very 110 00:06:19,920 --> 00:06:22,529 Vivek Dhar: conservative forecast. It's very much should be seen as a 111 00:06:22,529 --> 00:06:24,150 Vivek Dhar: budget as opposed to a forecast. 112 00:06:24,720 --> 00:06:28,260 Sean Aylmer: Okay. I mean, very conservative forecast. If you look at the long- 113 00:06:28,260 --> 00:06:33,180 Sean Aylmer: term price of iron ore, we're still reasonably high. We 114 00:06:33,900 --> 00:06:36,330 Sean Aylmer: even at $100. 115 00:06:36,330 --> 00:06:39,810 Vivek Dhar: That's right. The government's forecast is about $ 60 a ton by 116 00:06:39,810 --> 00:06:43,260 Vivek Dhar: third quarter. That's FOB Australia. If you convert that to a 117 00:06:43,830 --> 00:06:47,368 Vivek Dhar: CFR price, which is what the main benchmark is measured 118 00:06:47,370 --> 00:06:49,980 Vivek Dhar: in, we're talking, say, something closer to $ 70 a ton. 119 00:06:50,759 --> 00:06:53,818 Vivek Dhar: At $ 100 a ton, we're well above that level. But 120 00:06:53,820 --> 00:06:56,669 Vivek Dhar: there is actually cost support at these levels when we 121 00:06:56,670 --> 00:07:00,659 Vivek Dhar: talk about current pricing. One of the biggest shifts in 122 00:07:00,660 --> 00:07:04,498 Vivek Dhar: this market, which happened in early 2019, was when we 123 00:07:04,500 --> 00:07:07,529 Vivek Dhar: saw this fatal dam collapse in Brazil. Now, when that 124 00:07:07,529 --> 00:07:10,859 Vivek Dhar: happened, Vale lost tons from the market. A lot of 125 00:07:10,859 --> 00:07:13,950 Vivek Dhar: seaborne supply had to exit. That was replaced with high- 126 00:07:13,950 --> 00:07:18,000 Vivek Dhar: cost supply. As that has come in, that is really what 127 00:07:18,000 --> 00:07:21,479 Vivek Dhar: has supported pricing in that $ 100 a ton plus mark. 128 00:07:22,110 --> 00:07:24,989 Vivek Dhar: It takes a lot for prices to stay in 80 to $ 100 129 00:07:24,990 --> 00:07:28,020 Vivek Dhar: a ton because it means you're basically telling seaborne supply 130 00:07:28,020 --> 00:07:31,020 Vivek Dhar: to exit. So far, we don't think that's the signal 131 00:07:31,020 --> 00:07:33,840 Vivek Dhar: that needs to be sent. Even though prices can move 132 00:07:33,840 --> 00:07:37,110 Vivek Dhar: below 100, we don't think it'll sustainably stay here. We 133 00:07:37,110 --> 00:07:40,830 Vivek Dhar: think it'll likely stabilize between 100 to $ 110 a ton. 134 00:07:41,790 --> 00:07:44,909 Sean Aylmer: Okay. Let's move on to copper. When I was growing 135 00:07:44,910 --> 00:07:48,209 Sean Aylmer: up trying to learn economics, copper was the bellwether commodity. 136 00:07:48,330 --> 00:07:51,180 Sean Aylmer: What copper did was a pretty good indicator of how 137 00:07:51,180 --> 00:07:53,190 Sean Aylmer: things were going. Copper prices are very high at the 138 00:07:53,190 --> 00:07:55,440 Sean Aylmer: moment. Why is that? Is it still a bellwether? 139 00:07:56,160 --> 00:07:59,099 Vivek Dhar: It depends what drives it. Copper, because it's used in 140 00:07:59,099 --> 00:08:02,669 Vivek Dhar: so many end- use sectors, it is traditionally seen as 141 00:08:02,670 --> 00:08:05,309 Vivek Dhar: the bellwether because it gives you a health of how 142 00:08:05,309 --> 00:08:08,370 Vivek Dhar: are people consuming goods. But in terms of what has 143 00:08:08,370 --> 00:08:10,830 Vivek Dhar: driven the pricing, I think it matters. What has driven 144 00:08:10,830 --> 00:08:14,340 Vivek Dhar: it, particularly in the last few weeks, has been actually 145 00:08:14,340 --> 00:08:19,259 Vivek Dhar: supply disruptions. We saw Chinese copper smelters come out and 146 00:08:19,259 --> 00:08:23,069 Vivek Dhar: signal that they were looking to slow down copper refined 147 00:08:23,070 --> 00:08:26,760 Vivek Dhar: production, which is really a signal that there has been 148 00:08:26,760 --> 00:08:29,970 Vivek Dhar: supply disruption in this market. That's certainly been the case. 149 00:08:30,270 --> 00:08:33,150 Vivek Dhar: The big one has been a mine in Panama, which 150 00:08:33,150 --> 00:08:35,370 Vivek Dhar: accounts for about one and a half percent of global copper 151 00:08:35,370 --> 00:08:38,219 Vivek Dhar: supply. But it has really set the tone for the 152 00:08:38,219 --> 00:08:41,549 Vivek Dhar: market that we are going to see supply disruptions, and 153 00:08:41,549 --> 00:08:45,478 Vivek Dhar: that may lead to deficits. If you look at three- 154 00:08:45,480 --> 00:08:48,510 Vivek Dhar: month copper futures, it's come up to above $9, 000 a 155 00:08:48,510 --> 00:08:52,589 Vivek Dhar: ton. That's really been an elevation compared to what people expected. 156 00:08:53,460 --> 00:08:55,049 Sean Aylmer: Okay. The other one I just want to quickly mention 157 00:08:55,049 --> 00:08:57,900 Sean Aylmer: is coal because it's such a big export of Australia. 158 00:08:58,619 --> 00:09:02,190 Sean Aylmer: Obviously, we're way below the peaks that we had when 159 00:09:02,580 --> 00:09:07,920 Sean Aylmer: the war in Europe commenced. It's fallen back. But it's 160 00:09:07,920 --> 00:09:11,040 Sean Aylmer: not quite at the levels that it was pre- pandemic, 161 00:09:11,400 --> 00:09:14,069 Sean Aylmer: is it? It's still elevated compared to that. 162 00:09:14,729 --> 00:09:18,630 Vivek Dhar: Yeah. Look, it depends on which coal you're referring to. 163 00:09:18,630 --> 00:09:23,400 Vivek Dhar: But, look, on both coals... Look, the bigger correction, I'd 164 00:09:23,400 --> 00:09:26,730 Vivek Dhar: say, has so far happened in thermal coal. The reason 165 00:09:26,730 --> 00:09:29,429 Vivek Dhar: why that has corrected lower is that it often competes 166 00:09:29,429 --> 00:09:33,689 Vivek Dhar: with gas for your marginal power generation in Asia and 167 00:09:33,690 --> 00:09:36,960 Vivek Dhar: because gas markets, particularly in Europe, have proven to be 168 00:09:36,960 --> 00:09:41,370 Vivek Dhar: far better supplied than people thought. Stockpiles in Europe, for 169 00:09:41,370 --> 00:09:45,509 Vivek Dhar: example... They are, at this time of year, about 60 to 65% 170 00:09:45,510 --> 00:09:47,819 Vivek Dhar: right now. For this time of year, it should be 171 00:09:47,820 --> 00:09:51,299 Vivek Dhar: about 40 to 45% of capacity at the gas storage 172 00:09:51,299 --> 00:09:54,150 Vivek Dhar: levels. Because that is so well supplied, we've seen gas 173 00:09:54,150 --> 00:09:58,110 Vivek Dhar: prices come off, particularly LNG spot prices. That means thermal 174 00:09:58,110 --> 00:10:00,240 Vivek Dhar: coal, which competes with it, has also had to come 175 00:10:00,240 --> 00:10:03,900 Vivek Dhar: off. Both of those factors in terms of the thermal 176 00:10:03,900 --> 00:10:08,190 Vivek Dhar: and gas switching story has really played into this thermal 177 00:10:08,190 --> 00:10:11,309 Vivek Dhar: coal price that has fallen. But to your point on coking 178 00:10:11,309 --> 00:10:15,478 Vivek Dhar: coal, this has also fallen quite significantly, particularly since the 179 00:10:15,480 --> 00:10:18,840 Vivek Dhar: beginning of March. Really, what's driven the coking coal dynamic 180 00:10:20,040 --> 00:10:23,429 Vivek Dhar: for the last... I'd say since October until January. Supply 181 00:10:23,429 --> 00:10:26,730 Vivek Dhar: disruptions have kept coking coal prices above $ 300 a ton. 182 00:10:27,509 --> 00:10:30,029 Vivek Dhar: But then, what we've seen is we now know where 183 00:10:30,029 --> 00:10:33,689 Vivek Dhar: China is heading with policy. That has really started weighing 184 00:10:33,809 --> 00:10:37,740 Vivek Dhar: on that demand side. Those supply disruptions have eased. We've 185 00:10:37,740 --> 00:10:41,040 Vivek Dhar: now seen coking coal come well under $ 300 a ton 186 00:10:41,040 --> 00:10:44,819 Vivek Dhar: and now closer to 250 than 300. We've seen these 187 00:10:44,820 --> 00:10:47,490 Vivek Dhar: dynamics now play out. But as you said, there is 188 00:10:47,490 --> 00:10:50,940 Vivek Dhar: still this premium in the market compared to what it 189 00:10:50,940 --> 00:10:55,230 Vivek Dhar: was pre- COVID. That's really a function of supply disruptions 190 00:10:55,230 --> 00:10:57,718 Vivek Dhar: that have really been there since the Ukraine war because 191 00:10:57,719 --> 00:11:00,210 Vivek Dhar: Russia is such a big supplier. We are watching this 192 00:11:00,210 --> 00:11:03,780 Vivek Dhar: space very closely. But yes, certainly, I would say that 193 00:11:03,839 --> 00:11:08,730 Vivek Dhar: it's higher than what it was pre-COVID. But it's certainly 194 00:11:08,730 --> 00:11:10,950 Vivek Dhar: much closer to it than it was just a couple 195 00:11:10,950 --> 00:11:11,460 Vivek Dhar: of years ago. 196 00:11:11,970 --> 00:11:13,740 Sean Aylmer: Vivek, thank you for talking to FEAR & GREED. 197 00:11:14,250 --> 00:11:14,640 Vivek Dhar: Thank you. 198 00:11:15,150 --> 00:11:18,960 Sean Aylmer: That was Vivek Dhar, director of Mining and Energy Commodities Research 199 00:11:18,960 --> 00:11:22,228 Sean Aylmer: at the Commonwealth Bank. This is the FEAR & GREED Daily 200 00:11:22,230 --> 00:11:24,809 Sean Aylmer: Interview. Join us every morning for the full episode of 201 00:11:24,809 --> 00:11:27,660 Sean Aylmer: FEAR & GREED Daily Business News for people who make their 202 00:11:27,660 --> 00:11:30,420 Sean Aylmer: own decisions. I'm Sean Aylmer. Enjoy your day.