If you thought metal prices -- and iron ore in particular --
were still all about China, you would be right. However, Brazilian
monetary policy can make the difference between a profitable miner
and one to avoid.
[caption id="attachment_58263" align="alignright" width="300"
caption="Vale iron ore mine of Timbopeba, Minas Gerais, Brazil"]
[/caption]
First, the metals (
DBB
,
quote
) are still tracking Chinese industrial trends, and by extension,
the trajectory of Chinese economic growth.
China currently consumes about 40% of all metal refined every
year -- whether that metal happens to be zinc, copper, lead,
nickel, aluminum or iron -- to keep building out its cities and
bring the people in from the countryside.
As Beijing shifts toward a more consumer-driven economic model,
China's outsized demand for metal will moderate. But for now, the
Chinese economic miracle is definitely driving prices, and as GDP
growth cools, the commodity markets are exposed to the
downside.
Iron ore in particular -- one of the bulkiest of the big
contracts -- is weakening again as traders adjust to the new
reality of
maybe 7.5% growth
from China this year instead of an annual expansion of 10% or
more.
Right now, iron is trading at $145 a ton, down 1.5% from March.
After a few months of
aggressive buying
after the lunar new year, this is not a great indicator for the
future -- is this just a bad month or a sign of another leg
downward for the miners?
Leading Australian ore producers BHP Billiton (
BHP
,
quote
) and Rio Tinto (
RIO
,
quote
) have given up about 10% since peaking right after China's new
year break.
In Brazil, Vale (
VALE
,
quote
) -- the biggest iron ore miner in the world and the most
concentrated of the "big three" in that commodity -- has suffered
even bigger losses, down 15.5% in two months.
With commodity prices traded in dollars around the world, the
real question here is whether operating in Brazil can help Vale
maintain its profits better than its Australian rivals.
Mining companies around the world may remain universally hostage
to shifts in Chinese buying habits for a while. Even so, because
each is exposed to different currency environments, their results
will vary.
Both the Australian dollar and the Brazilian real have lost
ground against the dollar since February, making every
dollar-denominated ton of ore local miners sell more valuable on a
local-currency basis.
However, the Aussie (
FXA
,
quote
) has only dipped 3.6% as traders bet that Australian interest
rates will start moving lower. The real (
BZF
,
quote
) is already riding a
long decline in Brazilian rates
and is now down over 10% in under two months.
More rate cuts seem likely, which might make Brazilian ore --
and VALE -- a lot more interesting as the local central bank
abandons its traditional anti-inflationary focus
to stimulate consumer markets.
