Australian Boom or Bust

With CPI out today and expected to continue to rebound from 3.4% last month to 3.6% this month (should be out shortly after this article is published) the Aussie Dollar appears to be struggling against most other currencies at 65.4 AUD/USD and 60.3 AUD/EUR. But why then with these hot CPI numbers – outstripping its overseas peers (US 3.1% and Europe 2.8%) is the Aussie Dollar performing so badly? Look no further than the EV battery mineral markets in 2023 and the potential Iron ore glut of 2025 – what’s going on in this market and what could it mean for the struggling Aussie dollar?

Battery Market

With a growing EV car market, many new lithium and nickel mines were opened to spiking commodity prices with promises from Automakers of a rapid decade long replacement of gas guzzlers with their EV equivalents.   In 2023 signs of weakness in this market began to creep in and with it, drops in commodity prices with Lithium leading the way with an 85% drop and Nickel seeing a similar price boom/bust last seen in the GFC with a 44% drop last year, with additional supply from Indonesia.  Last Week BHP announced its first half earnings, cutting its dividend as its profit dropped 86% mainly due to impairments of $US 5.6billion from its nickel business and Samarco liability (mine collapse from 2015).

Source Tradingview: Comex Lithium Futures

Despite growth of EV sales still outstripping petrol/diesel vehicles, 2023/24 has seen a slew of weakness in the market, with the likes of Hertz looking to sell 20,000 EVs and replace them with their petrol vehicle equivalents with other announcements seeming particularly bearish on the EV transition such as Mercedes scaling back future plans to be fully EV by 2030, Apple (today) killing its electric vehicle car project,  Ford announcing 3 weeks ago it was reassessing its EV plans and finally Tesla slashing its Model Y prices in the United States 21% in the past year.

Similarly in China issues with freezing temperatures and lack of charging stations saw EVs abandoned on the side of the roads during the Lunar New Year holiday. One EV owner stated online than a journey between Shenzen and Jiangxi took 8 hours in a petrol car and 15 hours in an EV.  A slew of both new vehicle manufacturers and additional capacity in China, has seen issues in the German automaker markets and even Tesla is sounding alarm bells with BYD (A Chinese manufacturer) outselling Tesla in 2023.  

BHPs Iron Ore Outlook

BHPs Iron ore outlook appears positive, with their estimates of steel demand rising in the next 2 years, with India and Southeast Asia taking up the slack from the Chinese market which they believe will plateau at 1-1.1Btpa.  Due to these forecasts BHP plans to increase output to 305Mtpa (currently around 260Mtpa).

Yarra Capital Iron Ore Outlook - Battery Market style collapse

Investment manager Yarra Capital has just issued a contradicting sentiment to BHP, with a belief of both surging supply from the African Simandou region adding  an additional 60mt to world production as well as Australian and Brazilian mine expansions adding 100mt.  This, Yarra Captial estimated, could put the iron ore market in a 10% surplus next year.  To put this additional 160mt in context, BHP produced 129Mt in the first half of FY2024 (est 260Mt p.a).  To add to the supply glut, demand from China is also expected to slow.  China, which ‘represents about 70% of the global seaborne market’ is slowing as the housing cliff (15% supply bubble we previously reported on Evergrande Collapse – China now vs U.S. GFC | Ainslie Bullion) begins to wreak havoc on the steel market, with the some estimates expecting a 100Mt reduction in steel output equivalent.

As we started to see in 2023 with weakness in the Lithium and Nickel markets, the Iron Ore market with its slower supply chain cycle is similarly starting to see weakness due to both supply and demand pressures.  If Yarra Capital is right and BHPs forecasts too optimistic, this is bad news for the Australian dollar and stockmarket with Iron Ore giants representing a large proportion of the ASX. With just a $50/tonne drop in Iron ore prices the S&P/ASX 200 aggregate earnings could drop as much as 10%. 

This presents a possible double opportunity for gold as it is normally negatively correlated to ASX crashes (goes up when shares go down) and the lower AUD boosting the already strong USD spot price even further in local terms.