The cost of the iron ore input is around 5% of the final cost of a raw tonne of steel, so changes in iron ore prices arent going to change the price of steel very much.

oceanfire said..
I've been thinking about the iron ore price and how much it seems to have affected the economy here in Aus and I’m a bit confused; shouldn’t an ore price drop lower the cost of steel, thereby making it cheaper to build stuff, and hence boost the economy?

Anyone have any ideas?

The impact is huge - obviously...

- Royalties have plummeted and this has not been offset by increased production (tonnes).
- Income tax from highly paid workers has fallen.
- This flows on to all the service providers and then the broader economy as disposable dollars disappear.
- Government income tanks and more people (sorry, public servants - a special type of people ) are also out of work...

That's iron ore. Add in the collapse of oil and gas (another big hit to WA), and the earlier collapse of the coal price (big hit to NSW and to a lesser extend QLD - their coal is better)...

Then there is GST... this is all one pie, but WA's share of the pie fell to 30c in the dollar spent in WA - hardly a situation to promote growth...

Let's say 80 000 resources sector employees were made redundant and that the average salary of the people was $100 000. Income tax on a $100 000 salaray is ~$25 000. That's $2B on income tax alone... let alone GST, stamp duty etc etc...

FormulaNova said..
Before Christmas, the price of iron ore was low enough that scrap metal dealers were refusing steel scrap as it wasn't worth their while. The bigger buyers were paying next to nothing, so it was not worth the cost to get it to them.

I am assuming that steel requires slightly less effort than iron ore to remake into steel, so if that's worth nothing...

Some interesting and illuminating points definitely, but the above is along the lines of what I was thinking.

If the price for steel has crashed, shouldn't this stimulate other industries, such as construction possibly, that can take advantage of the price crash and hence create other jobs outside of mining?

Chris6791 said..
The Federal Govt are trying to encourage states to take up the opportunity of lower construction costs through big infrastructure projects but I doubt a tunnel and a handful of bridges are going to replace the many tens of billions no longer in the Australian economy through plummeting commodity prices.

Bit of a catch-22 anyway isn't it?
With the reduced revenue, the government wouldn't have a huge budget for construction projects.

So, what's the root cause of the problem?
Is it as simple as the iron ore producers continually ramping up production and flooding the market?

The domestic demand for iron ore is a drop in the ocean. Ball park figures. Australia mines over 500 million tonnes of iron ore each year and uses 7 million tonnes of steel. The vast majority of our Iron ore is exported, never to be used in our value adding supply chains.

pepe47 said..
Sorry, can't resist a cynical spin, but... Shouldn't a drop in oil price be reflected at the pumps also

A drop in oil price is reflected in the profits of the four remaining refineries in Australia - according to the Fin Review today

Elroy Jetson said..
The domestic demand for iron ore is a drop in the ocean. Ball park figures. Australia mines over 500 million tonnes of iron ore each year and uses 7 million tonnes of steel. The vast majority of our Iron ore is exported, never to be used in our value adding supply chains.

Exactly right. Global demand (Chinese led) for iron ore is down and supply is up leading to a glut of iron ore, which in turn has driven the price down. Production levels across the resources sector are actually still very high as the miners are trying to maximise output and get their unit costs down to cover fixed costs.

Supply and demand, chicken and egg...

Iron ore is in hot demand when the products which required steel to build, was high. As our consumption of goods, including construction, is in decline, so is the demand for iron ore. Less demand, lower cost.

To counter the reducing revenues, and consequently profits, producers such as BHP has a few options available.
(1). Reduce the number of employees
(2). Optimize its production practices
(3). Raise production level.

Option #1 and #2 had been done to death. So only #3 is left. So BHP keeps shipping away higher and higher amount of ore, in an effort to make up for the lower prices. That is a strategy may work for it in the long run as it may kill off many of the smaller and hence high cost junior miners. In the short term, it will still work for BHP because it has substantial amount of cash in reserve. However, in business, it is much to do with confidence. When you off-load your product at a basement bargain price, you may unsettle the market, As we all know stock markets are full schizophrenic people. Rumours and tiny sniff of uncertainty will set them off !

Another example is the oil prices. OPAC members are no longer able to hold a cartel together anymore. Saudi Arabia is determined to keep the oil production unchanged. it is constraint by 2 factors. It is running a budget deficit due to lower oil prices. The smaller shale oil producers in USA have cut into OPAC's market. In an effort to kill them off, Saudi Arabia and other major oil producers are doing what BHP is doing, ie. to keep the prices as low and as painful as possible, to kill off the high cost shale oil producers in USA.

Do we, the consumers of oil and steel benefit from it? To a small degree. However, judging by the amount of pains we suffer now, eg. employment, lower revenues for governments, etc, it is debatable.

Kozzie said..

oceanfire said..
I've been thinking about the iron ore price and how much it seems to have affected the economy here in Aus and I’m a bit confused; shouldn’t an ore price drop lower the cost of steel, thereby making it cheaper to build stuff, and hence boost the economy?

Sure the miners are missing out on dosh, but I would think the rest of the economy would benefit from lower steel prices.

Then I was thinking that with Aus being Aus and corporations being corporations...the steel companies probably don’t drop the prices though, which seems likely, cause they’re probably excited (short-sightedly so it would seem, if true) over making more profit per sale now.
If true that steel prices aren't being lowered to reflect the drop in price of the raw materials, the idiots will only be making better profit on a lower sales volume, which does nothing to stimulate the economy.
Surely they should lower the prices to encourage buying of steel for building stuff (technical term ).

Perhaps I'm missing something, I'll admit I'm not widely knowledgeable about the subject; perhaps the iron ore price is not the cause but is just a symptom of something else in play that is stuffing the economy?

Anyone have any ideas?

lower sales volume? when we buy steel (useually from one steel) were not trying to order more or less, steelys are paid by the tonne sometimes anyways and have been known to wack in slightly thicker gauge bars.

were not talking 2 for 1 special on doritos here where everyone buys twice as much because its cheaper. were talking about a comodoty that MUST be purchased and due to design/plan cant be altered. anyways thats the construction side of things. fabricators may be different but i doubt there just going to leave sheets in the yard for yonks cause they were on special once and spend months later watching them slowly decay

I wasn't talking about your mum buying up at Kmart cause the prices were on special; rather was thinking that lower cost materials could possibly spur on projects that may have been too costly previously, not just buying cause it's on special.

But I spose if a project was marginal before a steel price drop, then still may only be barely viable because a materials drop. But I guess that depends on how much of a drop in price it is.

I pulled some old rusty Dexion shelving down the other day and the boss was SO generous by saying that I could take it to the recycler and keep the proceeds.....
Wow just on 100kg of steel @ $00.02c / kg...... (He was a bit shocked)

I think the price of labour has more influence on the affordability of construction than the price of steel.

Here in WA we have reached a point where everyone needs a FIFO wage to survive, particularly if they have gotten into any kind of real debt (housing, cars, jetskies)

In turn a higher wage is still demanded than what should have ever been paid, at some point I think it will all collapse, but it won't be pretty.