Trusting your household income to fluctuations in the resource commodities could drive you to distraction — just stop and think about the sudden sticker-shock the provincial government got last year when oil prices and production dropped simultaneously, leaving the government with plunging revenue and an instant massive deficit.
But just the way commodity price changes can hit oil, they can also thump other resources.
Like iron ore. The provincial government has high hopes for the iron mining industry in Labrador, even planning new electrical lines to help supply neophyte mining firms. (Those high hopes continue, even after the announcement that the mine in Wabush would be closing because production costs are too high.)
But iron ore prices took a huge dip on Monday, and could slide much further.
China had unexpectedly weak economic performance last month, and while it’s almost half a world away, it’s worth keeping an eye on, because the nation is the world’s largest iron ore consumer right now.
On Monday, iron ore prices dropped by 8.3 per cent in a single day, with China’s largest steelmaker saying prices will drop even further. Since the beginning of the year, prices have slumped by almost 22 per cent.
“Prices have been irrational and the current decline is inevitable,” He Wenbo, the chairman of Baoshan Iron and Steel, told the Reuters news agency. Monday’s price was $104.70 a tonne.
“What will be the low point? I think that current prices of approaching $100 are still on the high side,” He told the news agency, adding that he believes China’s steel output could stop growing as early as 2018. That would be seven years ahead of when iron ore suppliers expected Chinese demand to flag.
The news comes as China’s stockpiled iron ore reached 105 million tonnes last week — the highest the stockpile has been since 2006.
The reason for the drop in prices (and for a corresponding drop in the value of the shares of many iron ore mining companies)?
In part, a drop of 18.1 per cent in Chinese exports for the month of February. Analysts also point to tightening financial markets: many Chinese steel makers have used their iron ore stockpiles as security for financing, and as cash-strapped firms try to turn those stockpiles into cash to pay off loans, the extra supply is pushing prices even further down. And that’s not the only extra supply that may be of concern: capacity increases by Brazilian and Australian mining operations could bring almost 20 per cent in additional iron to the shipped (seaborne) market in the next two years.
Some analysts are now predicting an average price for 2016 of just $80. It’s enough to make the average taxpayer nervous, especially when cash from commodities is such a huge part of our provincial revenues.
Iron ore companies like Rio Tinto are trying to temper those concerns, saying they expect short-term volatility but stronger long-term demand. That’s echoed by Jimmy Wilson, the president of iron ore for iron giant BHP Billiton, who told Australian news outlets “Our view is the long-term is still very robust. … We shouldn’t let today's price influence our long-term thinking.”
Perhaps not. But at the sharp end of the short term — over 1,000 provincial civil servants lost their jobs when oil revenues plunged last year, and we’re looking at a $300 million price tag for a new Labrador power line for iron mining and new iron-mining customers for Muskrat Falls hydro — it’s hard not to be more than a little alarmed.