Copper has been buffeted by macroeconomic and political news, suffering from trade tensions and fear of slowing growth in top consumer China. Conversely, iron ore has been trading at recent five-year highs this month, topping U.S. $130/ton amid reports of tight supply and robust demand. (We wrote last week about the apparent disparity between copper and iron ore price direction in China.)
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But a report in the Financial Times suggests what we may be seeing is simply a mismatch of timing.
The relatively well-supplied copper market has shown weakness in the absence of any supply-side dynamic to support higher prices. This comes despite, as we observed, falling treatment charges suggesting ore supply is getting tighter. Iron ore, on the other hand, has suffered supply outages from Brazil and constraints in Australia that, coming on top of historically low Chinese port inventories, has driven short-term demand this year and forced prices up.
That may be about to change, the Financial Times suggests.
The article focuses on miner Anglo American’s surprise decision to return $1 billion to investors via a buyback alongside $800 million as an interim six-month dividend this month.
The move is not in and of itself surprising, as Anglo has made record profits on the back of strong iron ore prices and a stellar rise in palladium prices. The miner reported a 19% increase in underlying earnings to $5.5 billion in the six months to June.
What is noteworthy is, despite the apparently strong position for both metals, Anglo has made no commitments — not even hints — that it will continue with buybacks in the year ahead.
The firm justifies its position by saying, “In terms of capital allocation, is it sustainable? Well, no. It’s a one-off . . . until such time as we accumulate more cash,” Anglo’s finance director Stephen Pearce is quoted as saying by the Financial Times. “It’s very much an ‘earn it before we think about it’ policy.”
What does that tell us about the miner’s expectations for iron ore prices in the year ahead?
The report observes the price of iron ore has fallen back to $118 per ton since its high, as the pace of stock declines at Chinese ports has started to slow in recent weeks — a signal that supply is starting to recover from problems earlier this year, according to analysts.
On top of that, there has been an increase in Chinese steel inventories, indicating output could slow in the second half of the year.
Steel prices had been supported by environmentally promoted steel mill closures, restricting supply as government-supported housing construction drove demand. However, although anti-pollution measures are expected to continue, it will require further stimulus to keep the housing market running at the current pace.
Anglo may be right to set cautious expectations about its ability to earn big rewards from iron ore in the near term.
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For the time being, at least, peak iron ore may already have been breached.