Australia’s Iron Ore Cash Cow Lives On

Last week the Australian Financial Review gave a run to a known problem – the federal budget could be cut by billions if global competition takes down the iron ore price.

We can sum up this argument in one word: Simandou.

This is the huge new iron ore development happening in West Africa. It’s even dubbed the “Pilbara Killer”. There are 3 billion tonnes of ore here. The first load will hit the water in the next two months. The plan is to get Simandou shipping 120 million tonnes annually – about two-thirds of what Fortescue did last financial year.

The supply from Simandou could, at least in theory, give China more pricing power and less reliance on Australian iron ore in general. Simandou won’t be producing at the full rate until 2028 or 2029. In 2026 it will still be in the ramp-up phase.

That’s good news for you, me, and every other Aussie – at least for today, this week, and even next year. In fact, there could be an investment opportunity here.

What do I mean?

Go back to the start of the year. Practically any investment bank analyst you care to name had one idea front and centre. It was this: the iron ore price was going one way – down.

I don’t mean in a dramatic sense. The consensus was that iron ore would drift to about US$80 per tonne by 2026.

That was back in January and February. We’re getting mighty close to Christmas now. What do we see? Iron ore is holding up better than expected, at about US$100 per tonne.

That means bank analysts and the general investment community are going to recalibrate their earnings forecasts for the big miners – and in the way we want to see: up!

You know the usual suspects – BHP (ASX: BHP), Fortescue (ASX: FMG), and Rio Tinto (ASX: RIO). It also gives the Australian federal budget a kick from higher tax and royalty payments. The Simandou takedown won’t happen just yet.

There’s nothing the share market likes to see more than higher earnings. That’s part of why high-profile stockpicker Jun Bei Liu said back on October 8:

“We think some of the major names like BHP, Fortescue and Rio will see earnings upgraded by almost 10 per cent because of the strength in spot commodity prices”, Liu said.

As ever with the ASX, it’s a balance of banks and resources at the top end. We know big banks are struggling to grow their earnings. We can say that confidently because we’ve already seen results from National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) last week, plus ANZ (ASX: ANZ) on Monday (10/11). That gives Aussie fund managers an incentive to pivot towards the miners.

The big question still lingers – is the Chinese economy going to throw a curveball and tank the iron ore price anyway?

It doesn’t look like it.

Here’s one thing to pay attention to. The Financial Times reported last week that China is borrowing US dollars at the same rate as the US government. Historically, they normally pay a premium.

Here’s a snippet from the report:

“Markets are flush with liquidity and geopolitical tensions have eased”, said David Yim, head of capital markets, Greater China and North Asia, at Standard Chartered.

“The issuance shows China is able to access the US dollar system at will”, said Mitul Kotecha, head of foreign exchange and emerging markets macro strategy at Barclays.

In other words, nobody is seeing a crisis or problem in China that they need to price higher risk on. China would be paying higher rates if so.

Of course, that could change. But it reminds me of something I read from the Wilsons group back in the second quarter. They noticed the same thing. It means Chinese policymakers can stimulate their economy without fear of capital outflows.

What else do we know?

China’s next full five-year plan is due in March 2026. They likely have two objectives. One is to get consumer spending higher – and they can only do that if they stop Chinese real estate prices falling, because it’s such a bedrock of Chinese net worth.

The second is ongoing investment into the power grid to cope with the rocketing demands of AI. Both look positive for iron ore.

I can’t be certain, of course, because I can’t read minds. I’m only inferring from the hints on the ground. But we only need iron ore to stay roughly where it is right now for a nice tailwind to build up behind the big miners.

It’s worth watching for. The best outcome in the short term is that we get a run into the end of the year and over Q1 CY26. They call that a Santa rally – and it would be very welcome indeed, Australian government finances included.

Save the worry for another year or two.