ASX: Iron Ore expected to decline to $55 per ton in next five years

Iron ore found short-term support at $90 per ton but this is unlikely to hold and our medium-term target is $80 per ton.

Iron Ore

Bloomberg published an interesting outlook on iron ore this week from Ed Morse, Global Head of Commodities Research at Citigroup:

“Steel demand is no longer going to be what it was,” Morse said in an interview. “No combination of India, Brazil and any other emerging-market country, no matter how big, is going to replace what China did alone,” he said, referring to spike in demand from the nation’s “fixed-asset investment extravaganza,” between the 1990s to 2010.

….Benchmark prices will end this year at the mid-$90s a ton, before falling to $75 at the end of 2020, he said. Five years out, they are seen at $55 a ton — a level that’s still well above current costs of production at the largest miners.

The ASX 300 Metals & Mining index found support at 4100 but the outlook is increasingly bearish. Breach of 4100 would complete a head and shoulders reversal with a target of 3400.

ASX 300 Metals & Mining

Given the importance of mining exports to the Australian economy, a fall in iron ore prices would be likely to increase downward pressure on the Aussie Dollar.

The Financial sector, on the other hand, is looking bullish at present, with Trend Index troughs above zero indicating buying pressure, in response to improved auction clearance rates. But housing woes are far from over and we expect them to remain a drag on growth for the next three to five years.

ASX 200 Financials

The ASX 200 continues to edge upwards, heading for another test of resistance at its 2007 high of 6800. Hanging man candles over the last three weeks warn of profit-taking, which is slowing the rally’s progress. Expect stubborn resistance at 6800. Reversal below 6400 would warn of a decline to test primary support at 5400.

ASX 200

We increased exposure to Australian equities, to 25% of portfolio value, this week but with an increased focus on defensive stocks, because of our bearish outlook.

ASX: Expect stubborn resistance

Iron ore continues to edge downwards after a sharp fall. This is a continuation pattern and our short-term target is $80/tonne.

Iron Ore

The Materials index found support at 12500/12700 but the outlook is increasingly bearish. We need to be alert for a possible head and shoulders reversal with a break below 12500.

Materials

The ASX 200 is edging upwards, towards another test of resistance at its 2007 high at 6800. A Trend Index trough above zero signals buying pressure but hanging man candles for the last two weeks warn of reversal. Expect stubborn resistance at 6800.

ASX 200

We maintain a low exposure to Australian equities, at 20% of portfolio value, because of our bearish outlook.

ASX: Falling approvals and construction warn of a slow-down

Australian building approvals for July 2019 show a sharply contracting economy. Housing approvals fell by 16.6% on a year-on-year basis and are approaching the 8000 level breached in earlier crashes.

ABS: Australian Building Approvals: Houses (SA)

Approvals for apartments (dwellings excluding houses) plunged by a massive 44.2% year-on-year.

ABS: Australian Building Approvals: Dwellings Excluding Houses (SA)

The massive contraction in approvals is likely to impact on construction work in the months ahead. Unless we see a similar spike in public sector spending to the 2008/2009 global financial crisis, we are likely to experience a similar contraction to 1988-1990 or 2000-2001. Cutting interest rates, as RBA governor Phil Lowe has repeatedly warned, is not enough.

ABS: Australian Construction Work Done - Chain Values (SA)

Unfortunately infrastructure spending in 2008/2009 was not particularly well-directed, increasing public debt without corresponding productive assets to show for it. The NBN has had a few teething problems but made a lot more sense than the school halls and pink batts programs: it produces income (or can be sold) to offset the impact of the debt.

Construction contributes about 15% of national GDP and a sharp downturn could bring us precariously close to negative GDP growth.

The boost from bulk commodity prices is fading, with iron ore edging downwards after a sharp fall. This is a continuation pattern and we expect the decline to continue, with a short-term target of $80/tonne.

Iron Ore

We also retain our bearish outlook for the financial sector. Banks face headwinds from falling new housing starts as well as from narrow margins as the RBA cuts interest rates in an effort to stimulate the economy. Expect another test of primary support at 5400.

Financials

The ASX 200 is testing resistance at its 2007 high of 6800. A rising Trend Index signals buying pressure but we remain cautious because of the headwinds facing the domestic and global economies.

ASX 200

We maintain a low exposure to Australian equities, at 20% of portfolio value, because of our bearish outlook.

ASX 200 breaks support

Iron ore continues to test support at $94/tonne. Breach of support would signal a decline to test $80/tonne.

Iron Ore

The ASX 200 broke support at 6450/6500 after a hesitant rally, warning of a decline to test support at 6000. Descending peaks on Twiggs Money Flow signal rising selling pressure.

ASX 200

The ASX 300 Banks index retreated from resistance at 8200 and is testing the rising trendline. Penetration is likely and would warn of another test of primary support at 6750.

ASX 300 Banks

We maintain a bearish outlook for Australian stocks and reduced our exposure to 30% on 5 August 2019.

ASX: Dead cat bounce

The ASX 200 found support at 6450/6500 followed by a hesitant rally: a candle with a long tail followed by a short-bodied evening star. This resembles a typical dead cat bounce. Breach of 6450 is likely and would warn of a decline to test support at 6000.

ASX 200

Gerard Minack in a recent report suggested that Australia is likely to go into recession if the saving ratio increases. For the past few years, consumption has been growing at a faster rate than disposable income as households dig into savings to maintain their lifestyle.

Australia: Consumption, Disposable Income & Saving

Households may continue this behavior because of the wealth-effect (they feel asset-rich but cash-poor) but are likely to reverse sharply if housing and equity prices fall. Which is what we are witnessing at present.

Australia: Housing Prices

In our view, the housing decline is likely to continue despite the RBA cutting rates. While rates may be attractive, job prospects are looking shaky. Loan approvals are falling.

Australia: Housing Loans

Business investment is falling.

Australia: Business Investment

Job ads are about to go over a cliff. Trade tensions with China will add to our woes.

Australia: Job Ads

Public funded infrastructure construction is slumping.

Australia: Public Construction

Credit and broad money supply growth are approaching 2009 GFC lows.

Australia: Credit & Broad Money

And our iron ore tailwind is dying fast. Iron ore spot prices have fallen off a cliff. Breach of support at 95 is likely and would warn of another decline to test support at 80.

Iron Ore

I plan to further increase the level of cash in our Australian Growth portfolio.

ASX: Iron ore plunges

Iron ore spot prices plunged from $120 to $106.50/tonne in two days. Penetration of the rising trendline is highly likely and would warn of a strong correction. A spike up is often followed by a spike down.

Iron Ore

The ASX 200 retreated from its 2007 high at 6830. Penetration of the rising trendline is now likely and would warn of a correction. The first line of support is 6350, with stronger support at 6000.

ASX 200

We have increased the level of cash in our Australian Growth portfolio.

Iron ore tailwinds lift the ASX

Further increases in iron ore prices are predicted. Enrico de la Cruz at Mining.com reports:

Singapore-based steel and iron ore data analytics firm Tivlon Technologies is keeping its price forecast of $150 a tonne by October.

“We expect the launch of infrastructure projects in China to peak in the third quarter and further uplift demand for steel,” it said in a note.

Narrow consolidation is a bullish sign, suggesting another advance.

Iron Ore

The Materials index continues its up-trend. A Trend Index above zero would signal increased buying pressure.

ASX 200 Materials

Financials continue to test resistance at 6450 but face headwinds from the housing market and construction.

ASX 200 Financials

The ASX 200 is testing its 2007 high at 6800. A rising Trend index indicates buying pressure. Penetration of the rising trendline on the index chart is unlikely but would warn of a correction.

ASX 200

We maintain a high level of cash in our Australian Growth portfolio because of expected headwinds from housing and construction.

ASX 200: Iron ore tailwinds continue

The ASX continues to enjoy a massive tailwind, with iron ore spot prices holding above $120/tonne. Prices are expected to moderate, with Brazilian exports recovering. Clyde Russell at Mining.com comments:

“Even if Brazil’s exports do remain slightly below normal, it may be the case that the iron ore forward curve is currently too optimistic. The Singapore Exchange front-month contract closed at $121.24 a tonne on Wednesday, while the six-month contract was at $100.52 and the 12-month at $89.52. This shows traders do expect prices to moderate…”

Iron Ore

The Materials index continues to climb, with rising troughs on the Trend Index signaling buying pressure.

ASX 200 Materials

REITs continue their strong up-trend, in expectation of lower interest rates. The equity (dividend) yield on VAP/ASX 300 REITs has fallen to 4.3%.

ASX 200 REITs

Financials are testing resistance at 6450 but face headwinds from declining house prices and construction work.

ASX 200 Financials

The ASX 200 is headed for a test of its 2007 high at 6830, with a rising Trend index indicating buying pressure. Penetration of the rising trendline on the index chart is not likely but would warn of a correction to test support at 6000.

ASX 200

We continue to maintain a high level of cash in our Australian Growth portfolio.

ASX tailwinds v. headwinds

The ASX continues to enjoy a massive external tailwind, with iron ore spot prices holding at $120/tonne.

Iron Ore

Headwinds stem mainly from domestic sources. Low employment and disposable income growth have slowed consumption, especially of durables such as housing and motor vehicles. Construction work done in the private engineering sector (mainly mining and energy related) continues to decline after a dramatic fall in 2013-2015. Public sector spending is also tailing off as the NBN roll-out winds down.

Australia: Construction Work Done

Private sector building still shows some resilience but is expected to fall as approvals for new residential construction decline (source: ABS).

Australia: Building Approvals

My concern is that the headwinds will outlast the tailwind, in which case all three construction sectors could fall to 2006 levels.

The ASX 200 continues to advance, headed for a test of its 2007 high at 6830. A declining Trend index would warn of rising selling pressure, while penetration of the rising trendline on the index chart would signal a correction to test support at 6000.

ASX 200

We continue to maintain a high level of cash in our Australian Growth portfolio.

ASX: Iron ore at $120

The ASX is still enjoying a massive tailwind from iron ore prices, with  spot prices close to $120/tonne.

Iron Ore

My concern is how long this tailwind will last. But the ASX 200 advances unperturbed, heading for a test of its 2007 high at 6830. Penetration of the rising trendline is unlikely but would warn of a correction to test support at 6000.

ASX 200

I continue to maintain a high level of cash in my Australian Growth portfolio because of long-term headwinds.