A freight train from BHP Billiton Ltd. with iron ore travels on a rail towards Port Hedland, Australia.
Ian Waldie | Bloomberg | Getty Images
SINGAPORE – The Australian dollar has jumped to its highest level in more than two years, aided by soaring iron ore prices.
It rose above 0.75 against the dollar late last week, a high that has not been seen since 2018. The Australian currency was already up, up nearly 8% against the dollar since the beginning of this year.
“The AUD continues to jump, trading above 0.7570 in Asia on Friday, aided by the rise in commodity prices last week and the rise in iron ore prices due to a number of factors including the weather in Port Hedland,” Tapas said Strickland, Director of Economics and Markets at National Australia Bank. Port Hedland is a city in Western Australia.
According to analysts, iron ore prices have risen as demand from China has risen and have been further strengthened by dwindling supply and disruption from storms in Australia, the world’s largest producer.
Iron ore futures on China’s Dalian Commodity Exchange rose nearly 10% to an all-time high on Friday, breaking the 1,000 yuan ($ 152.95) per ton mark for the first time in history.
ANZ Research’s Hayden Dimes attributed the higher prices on Monday to strong demand from China. Australia accounted for around 60% of global sea transport in 2019. according to the World Steel Association.
“There is no doubt that Chinese demand was stronger than expected in the face of fiscal stimulus measures. However, the risk of further supply disruptions accelerates this,” he said.
China’s economy has largely recovered from the worst effects of the coronavirus, in part due to impulses pouring into infrastructure. This has led to an increase in the demand for iron ore, a component of steel making.
China buys much of Australia’s iron ore that has been spared in a year of deteriorating relations that weighed on many of Australia’s exports to the Asian country.
“Increased iron ore prices help the AUD ignore bad news, including further deterioration in Australia-China relations,” the Commonwealth Bank of Australia (CBA) added in a note on Monday. Commodity prices are a major driver of the fair value of the Australian dollar.
Many of Australia’s exports – including wine, barley and cotton – have been hit by the country’s geopolitical tensions with China largest trading partner. Canberra-Beijing bilateral relations deteriorated earlier this year after Australia backed a growing demand for an international investigation into China’s handling of the coronavirus pandemic.
Iron ore, however, was spared in the growing dispute the CBA attributed to China’s few alternatives.
“With China accounting for 80 to 85% of Australia’s iron ore exports, the unusual drop in Australian iron ore exports has raised concerns that China may restrict imports from Australia,” said Vivek Dhar, director of mining and energy resources research at the bank.
Compared to the last four weeks, Australian iron ore exports fell by around 6.1% for the week ending December 4th – which, according to Dhar, was “unusual” for this time of year.
“And while those concerns may be justified, given that Australia’s coal and copper concentrate exports to China were already under unofficial restrictions this year, we feel it is too premature to make a similar call for iron ore,” he said.
– CNBC’s Elliot Smith and Saheli Roy Choudhury contributed to this report.