Nev Power, the man who runs Andrew Forrest's third force in iron ore, Fortescue, is something of an optimist. As the company's share price was in freefall on Thursday he fronted up to media and investors putting a relatively positive spin on the outlook for prices of the commodity most pivotal to the health of the Australian economy.
In previous periods Power has underestimated price falls and price gains and he now thinks it will settle at about $US60 ($79) to $US65 per tonne.
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Why iron ore's rally is under threat
Iron ore has a very tough act to follow in 2017. After surging last year in a rally that caught out many investors, the commodity faces a challenge as supply concerns re-emerge.
Having ridden price rises in iron ore for more than a year, the big producers like Fortescue now need to reassure investors they are match fit to cope with the wild downward gyration in price.
For the sake of the broader economy – and Fortescue shareholders – let's hope he is right and we don't reach the $US45 that the previous federal treasurer, Joe Hockey, predicted less than two years ago.
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The trouble is that the myriad professional analysts and forecasters that follow this market have a significantly less rosy view of where the price will bottom out – more like $US50 a tonne.
As prices have spiralled down over the past few weeks and the decline momentum has moved into full swing this week, the I-told-you-so cries have been louder than ever.
As the price of iron ore irrationally moved up to more than US$94 in February – it was these bearish experts that were red faced. Today their predictions have been, at least in part, vindicated.
It is now below $US70 and falling – a whopping 28 per cent drop in a matter of weeks.
Realism reigns
To be fair the big producers including BHP Billiton and Rio Tinto have not been in denial about the iron ore price bubble – warning investors for more than a month that the recent prices have been something of a mirage.
Realistically the price of iron ore should never have reached February's heady levels. The stockpiles in China had grown from hillocks to mountains – illustrated so deftly by a recent media report that there was enough of it sitting on the Chinese ports to build 13,000 Eiffel Towers.
It was this kind of supply-demand analysis that informed the view from analysts that the price of iron ore was unrealistic. And of course they were correct.
Nothing is more predictable than volatility when it comes to commodity prices.
But fundamentals can become disconnected with daily price movements that are determined by a futures market which is highly speculative.
Blame futures
It is the futures market that needs to take most of the blame for exaggerated slump in prices 16 months ago – more than was justified by the market fundamentals at that time.
It's a salutary lesson for the politicians in Canberra who until a few weeks ago were clocking up the revenue gains from additional corporate taxes they would receive from big mining companies like BHP Billiton and Rio and Fortescue had these elevated prices been sustained.
Sure the federal coffers will get a handy boost from the revival in prices over the past year. But given it won't be sustained let's hope these proceeds are not applied to long-run spending programs as previous federal government regimes have done.
Nothing is more predictable than volatility when it comes to commodity prices.
The demand for steel from China remains robust at this point but supply of iron ore is still an issue with new product coming on from Vale and Gina Rinehart's Roy Hill in the Pilbara.
From a corporate perspective, the falling iron ore price takes the gloss off earnings from the major producers, but they have all now got their balance sheets in order and their costs down sufficiently to weather a price-deterioration storm.
Dividends will move around but our large players are on safe ground.
Where it goes from here – once those stockpiles are whittled down – depends on Chinese government policy. More immediately it also depends on whether uneconomic producers of iron ore continue to leave the market.
The bigger picture is that the fall in prices has rattled the market with sliding share prices for BHP and Rio contributing to a slump in the overall Australian market in the lead up to the Easter break. Hope that the market index reaches 6000 is increasingly elusive.