Barclays: gold under downside risk

by Scrap Register

NEW YORK (Scrap Register): Dollar strength continues to burden gold as prices slipped to almost three-month lows. Stronger-than-expected US macro data have exposed gold’s lack of support from the physical market, as well as investors’ lack of conviction.

In Barclays' view, gold continues to look vulnerable. Palladium , meanwhile, has held up relatively well, and recent data, notably US car sales, continues to underline its strong fundamentals.

Precious metals prices suffered a sharp correction at the start of the week, as stronger-than expected US macro data, coupled with a strengthening dollar, weighed upon prices, sending gold towards $1260/oz and silver slipping below $19/oz – levels last seen in mid-June. Platinum dipped below $1400/oz, a level last seen in April, while palladium remained the most resilient, testing only two-week lows.

Gold has been at the mercy of the macro environment this week with news from both sides of the pond lending gold little favour. Macro data from the US have been better than expected, increasing market speculation of earlier rate hikes.

While in Europe, the ECB rate cut and ABS purchase programme to be launched in October have driven the euro to weaken further against the dollar. The EUR/USD is now trading at levels last seen in July 2013 on the back of the ECB announcement and expectations for a Fed rate hike next year. The strength of the dollar has weighed upon gold, but prices have held up relatively well, considering the magnitude of the move in the currency.

The correlation between gold and the EUR/USD has fallen to close to 10%. Thus, although a negative for gold, the geopolitical backdrop has meant that gold has not suffered to the extent that its vulnerable floor suggests.

In Barclays' view, this means that gold is still exposed to further downside risk, particularly in light of the limited physical appetite for the metal. September usually marks the start of rising demand ahead of the festival- and wedding-related buying in India.

While Barclays does expect an uptick in consumption, given the weaker-than-usual monsoon, Barclays expects the overall appetite to be softer than normal whilst the smuggling of gold remains ripe. Turkey’s latest trade data for August showed that shipments remained subdued in August, at 2 tons, while Ramadan weighed upon appetite in July, buying has not picked up significantly thereafter.

Separately, ETP holdings for gold have continued to shrink with preliminary data for August revealing an outflow of 11 tons and flows in September have started the month off on a negative note at 9 tons.

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On The Cusp Of Exposing The Full Iceberg

by Guy Haselmann

Financial markets are being pushed and pulled by a variety of cross-currents. Much of the turbulence unfolding is the culmination of imbalances and tensions that have been brewing for many years.  Amplified volatility in FX and commodity markets are warning signs.  They appear on the cusp of spilling more broadly into other markets, exposing the full size of the iceberg.

The current environment is distinct from the period of 2009-2013 when governments and central banks were quasi-coordinated in providing gargantuan amounts of stimulus, and when the geo-tensions were only chirping modestly.  This year, governments and central banks have focused more generally on domestic issues. This is good in theory, but it has splintered coordination into a quasi-fracturing of the global monetary system.

It should be widely known by now that past stimulus measures have ballooned sovereign debt levels and pushed official interest rates toward the zero lower bound; while other policies and regulatory changes have prodigiously distorted and manipulated asset prices and the cost of money.   Stimulus, however, is no longer a one-way street.

Diverging policies serve as a trigger for capital flow movements. They are shaking the foundation of capital markets, which in turn is causing second order effects like a mini-contagion. In addition, new and ever-evolving rules for investing and financial transacting have had a deleterious impact on market liquidity that will make the swishing capital flows even more magnified and treacherous for financial markets.

For several decades, the global economy has benefited from globalization made possible by technological advancements.   Technology has shrunk the world by being able to access more markets, and move capital and goods more efficiently.  Political change (e.g., fall of the Berlin Wall) has mostly created larger and more market-friendly policies. The changing landscapes unleashed innovative capacities that typically provided great benefits and opportunities.  While these factors will continue to exist, they are being met with the strongest headwinds in decades.

Protectionism, nationalism, and separatist movements could begin to have great negative impacts. The social contract between people and governments has been breaking down, as witnessed in voting booths and through violent protests.  Going forward, portfolios could begin to be impacted, as they activate large capital flows between sectors, securities, asset classes, and geographic regions.   Investors are probably ill-equipped for a market shift from a state of low-volatility and herd-mentality investing, toward one characterized by greater bifurcation and a sustained spike in volatility.

Markets have largely ignored the wars and tensions occurring in the Middle East and elsewhere.  This is because, while everyone recognizes the tragedies occurring at a human level, investors realize that most disputes are far away with little effect (so far) at the investment level.  In addition, troubles abroad can mean capital inflows for the US (“a cleaner dirty shirt”).

A successful Scottish independence vote next week could be the game-changer. Until earlier this week, most believed there was no chance of Scotland breaking from the UK.  Even after a flip in one poll showed a 1 point advantage for the “yes” campaign (for independence), most still assumed that it would not occur because they assumed that fear of what it would entail would prevail.  The “no” camp fuels the fear by labelling such a scenario as an act of “madness”.

However, in all likelihood, a vote for independence may not be as far-fetched and radical as the “no” campaigners suggest.  The transition into independent statehood could actually go fairly smoothly with particulars negotiated in a fair and level-headed manner.  There will be initial costs, but for supporters, pride trumps (unknown) costs.  Fear about using the British Pound is also over-hyped as the Pound is a highly tradable freely-convertible currency.  Moreover, Scotland could set up a currency board monetary authority in less than one day.

The arguments and grassroots campaign of the “”yes” camp has been superior in most aspects to the disjointed fear-emphasis campaign of the “no” camp.    Due to the momentum and organization of the “yes” camp, the odds of “yes” are better than even-money (even though betting organizations put it at 36%). 

The bottom line is that a “yes” vote is a distinct possibility; one that markets are not fully prepared for.  This is because it would encourage separatist movements across Europe and beyond.  As these types of uncertainties and anti-globalization aspects mount, long-dated USD-denominated Treasuries should be the marginal benefactor.

In addition, tomorrow is 9/11 and the last of the August refunding auctions. The other auctions were purchased at decent levels after reasonable concessions, helping to place the securities in stronger hands.  It was also a good sign that German Bunds fully regained early losses today. These are just a few reasons to own long Treasuries.  Too many cross-currents and too much yield pick-up and carry makes it too soon to focus on the 2015 Fed (just yet).

“…And the hypnotic splattered mist was slowly lifting…”  - Bob Dylan

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Too clever by half

By Daniel P. Collins

It is one thing to read the “so called” Fed tea leave and another to be so tied to your point-of-view that you ignore the writing in front of you; and instead attempt to read between the lines.

Most of the confusion over Federal Reserve monetary policy over the last year and a half has been due to so called experts defending their mistaken analysis rather than confusing  cross signals from the Fed.

I understand that I have been somewhat of an outlier on Fed issues as their policy path over the last year has appeared perfectly clear to me. Former Fed Chief Ben Bernanke announced last year that the Fed would at some point begin tapering its assets purchases (QE3), probably before the end of the year. This was at his June press conference. A month earlier he indicated that tapering could begin over the next few meetings. He also said—ad nauseam— that any policy shift would be data dependent.

After the June 2013 press conference most analysts targeted the September 2013 meeting as the beginning of tapering. I agreed with the assessment. But in the months following that statement, the jobs number last summer came in much weaker than expected. When Bernanke said any policy shift would be data dependent, he actually meant it. I understand some analysts dismiss such qualifications but it is why they got it wrong. Based on the numbers it was clear the Fed would not begin to taper at the September meeting. Add to this that Congress was threatening another government shutdown and a possible default and it jeopardized the yearend target.

Fortunately — depending on your perspective I guess — cooler minds prevailed in Congress and the jobs picture improved in the last quarter allowing the Fed to stick to the yearend target announcing a taper after the December meeting.

In responding to a question at her first press conference new Fed Chair Janet Yellen famously suggested that actual tightening could begin as soon as six months after the end of tapering. This shocked many who saw Yellen as more of a dove than Bernanke but it really should be taken in context. One, she was responded to a specific question and two the qualification that any policy shift would be data dependent remained in place.

Assuming the economy continued to grow and the Fed was anxious to end the asset purchases this put the earliest possible tightening around the beginning of the second quarter.  This was not as earth shaking as it appeared. And people began to question Yellen’s dovish credentials when she carried on the taper through some soft first quarter 2014 numbers.

As the economy picked up and a string of 200K plus nonfarm payroll reports (ending with the August report) analysts began to worry or project a closer onset of actual tightening.

But all along a majority of analysts and the Fed Funds futures market were indicating a taper by the end of the second quarter/beginning of third quarter 2015. Some pessimists looked out to the end of 2015 but that is not that big of a window, with all that interim data to be considered.

All the recent August jobs number did was end the speculation that a tapering could come at the earlier stage Yellen said was possible—which no one believed anyway.

Of course the real problem is that in a typical recovery—we are going on five years now —the Fed Funds rate would be at a level nearing what in the past could be described as an equilibrium level. A place where, if the recovery was looking like it could falter—not something unexpected five years into a recovery—the Fed would be in position to add some stimulus.

That perhaps is the criticism that Fed should face, not its forward guidance—which has been remarkably clear from my perspective—but the fact that it has now left itself without many options if the economy turns sour again.

Remember the Fed could have stayed true to its pledge of keeping rates at “a highly accommodative stance of monetary policy” with rate of 1% or 2%. During the recession of 1990-91, which cost the first President Bush his job, the Fed Funds rate bottomed out at 3%.

It would be nice to end the accommodation from the credit crisis before the next crisis is upon us.

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Why Has Classical Capitalism Devolved to Crony-Capitalism?

by Charles Hugh Smith

The money-shot: "People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

Here is the quote that perfectly captures our era: "People of privilege will always risk their complete destruction rather than surrender any material part of their advantage." (John Kenneth Galbraith) The trick, of course, is to mask the unspoken second half of of that statement: everybody else gets destroyed along with the Elites when the system implodes.

Union pension funds: toast. Government employees' pension funds: toast. 401Ks: toast. IRAs: toast. The echo-bubble in housing: toast. The Fed's favorite PR cover to cloak the enrichment of their financier cronies, the wealth effect:toast.

The primary tool the Elites use to mask the risk of complete destruction is magical thinking--specifically, that "given enough time, the system will heal itself."

That's rich, considering that the Elites' primary tool of avoiding destruction is crippling the market's self-healing immune system: price discovery. Thanks to ceaseless interventions by central banks, the price discovery mechanism has been shattered: want to know the price of risk? It's near-zero. Yield on sovereign bonds? Near-zero. And so on.

Prices have been so distorted (the ultimate goal of Central Planning everywhere, from China to the EU to Japan to the U.S.) that the illusion of stability is impossible without more intervention.

This leads to two self-liquidating dynamics: diminishing returns (every intervention yields less of the desired result) and the Darwinian selection of only those money managers who believe risk has been vanquished.

Everyone who pursues prudent risk management has either been fired or saw the writing on the wall and exited stage right. So the only people left at the gaming tables of the big institutional players are those individuals who are genetically incapable of responding appropriately to rising risk. Those who did have long been fired for "underperformance."

So how did classical free-market capitalism become state-cartel crony-capitalism, a Ponzi scheme of epic proportions that is entirely dependent on ceaseless central bank perception management and interventions on a scale never before seen?

We can start with these six factors:

1. Those who control most of the wealth are willing to risk systemic collapse to retain their privileges and wealth. Due to humanity’s virtuosity with rationalization, those at the top always find ways to justify policies that maintain their dominance and downplay the distortions the policies generate. This as true in China as it is in the U.S.

2. Short-term thinking: if we fudge the numbers, lower interest rates, etc. today, we (politicians, policy-makers, money managers, etc.) will avoid being sacked tomorrow. The longer term consequences of these politically expedient policies are ignored.

3. Legitimate capital accumulation has become more difficult and risky than buying political favors. Global competition and the exhaustion of developed-world consumers has made it difficult to reap outsized profits from legitimate enterprise. In terms of return-on-investment (ROI), buying political favors is far lower risk and generates much higher returns than expanding production or risking investment in R&D.

4. The centralization of state/central bank power has increased the leverage of political contributions/lobbying. The greater the concentration of power, the more attractive it is to sociopaths and those seeking to buy state subsidies, sweetheart contracts, protection from competition, etc.

5. Any legitimate reform will require dismantling crony-capitalist/state-cartel arrangements. Since that would hurt those at the top of the wealth/power pyramid, reform is politically impossible.

6. Understood in this light, it’s clear that central bank monetary policy—zero-interest rates, asset purchases, cheap credit to banks and financiers, QE, etc.—is designed to paper over the structural problems that require real reform.

Japan is a case in point: the Powers That Be in Japan have put off real reforms of the Japanese economy and political system for 25 years, and they’ve enabled this avoidance by pursuing extremes of fiscal and monetary policy that have eroded the real economy and created long-term structural imbalances.

In this 24 minute video Gordon T. Long and Charles Hugh Smith discuss through the aid of 17 slides the rapid advancement of Crony Capitalism in America. The facts are undeniable, but why is it becoming so obvious and undeniable? Why is it accelerating without any apparent 'checks and balances'? Where have the safeguards against this happening gone?

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Ice Buckets and Ebola

by Abdulrahman M. El-Sayed

NEW YORK – The “Ice Bucket Challenge” was the feel-good health story of the summer. YouTube videos of friends, family, and co-workers emptying buckets of ice-cold water over their heads has raised awareness, and millions of dollars in funding, for research on amyotrophic lateral sclerosis. ALS is a degenerative neuromuscular disease that robs thousands of people worldwide of active control of their muscles, making them prisoners in their own bodies. Research on ALS should be well funded, and the campaign appears to show the public’s readiness to fight for anything that might save lives.

Or does it? The contrast between the Ice Bucket Challenge and this summer’s other major health story, the worst Ebola outbreak in recorded history, could not be more striking. While thousands of Americans soak themselves to benefit ALS research, Ebola has become a public-health catastrophe in West Africa, one of the world’s poorest regions. The virus kills up to 90% of its victims by interrupting the blood’s natural ability to clot, causing terrible bleeding and shutting down vital organs. As with ALS, there is no tried and tested way to prevent or treat the disease.

In just a few weeks, Ebola has infected 3,707 men, women, and children, so far killing 1,848. The World Health Organization (WHO) predicts that the disease could infect 20,000 people before it is controlled. Although far more than 20,000 people worldwide have ALS – from which many will die – the highly infectious Ebola virus is different, because it can wipe out entire communities.

Preventing Ebola’s spread involves painstaking tracking and quarantining of high-risk individuals. But doing so is often impossible owing to lack of funds, manpower, and infrastructure, requiring the military to quarantine entire neighborhoods. Moreover, the virus has claimed the lives of many doctors trying to treat victims, and forced the closure of hospitals that were unable to contain the virus.

The impact on struggling economies has been devastating. For example, in Liberia’s capital, Monrovia, the price of Cassava, a dietary staple, has soared by 150%, along with price rises of other basic foods. As a result, even after the epidemic has passed, survivors will continue to struggle.

This raises a simple question: Why have so many people – first in the United States, and then around the world – seemed so eager to support ALS research while ignoring a far more urgent public-health (if not humanitarian) crisis. Part of the answer is that the Ice Bucket Challenge has given an esoteric disease a human face. People increasingly identify with the fight against ALS through the entertaining video recordings of friends and relatives. By contrast, the Western media has portrayed Ebola as yet another in a long list of tragic, African diseases that has little impact elsewhere.

But there is another, perhaps more disturbing, explanation. Ebola’s main victims – poor, black, African – are part of a demographic that, to put it mildly, is of little interest to mainstream America. Consider, for example, the different perspective on August’s protests in Ferguson, Missouri, which followed the police shooting of a young, unarmed black man. Surveys reveal that 80% of African-Americans thought the issue had raised important questions about race in the United States; only 44% of whites agreed.

So it should not be surprising that the $110 million that the Ice Bucket Challenge has already raised for ALS is almost 50% more than the US government has committed to fighting Ebola, despite public-health leaders’ pleas for funds. Maybe the ALS Association, which sponsored the Ice Bucket Challenge, would consider allocating a proportion of its money to help the effort to end the Ebola epidemic. Such a move would be unprecedented, but desperate times call for desperate measures.

ALS fundraisers may celebrate the fact that their campaign has “gone viral.” For Ebola sufferers, that very modern phrase carries a different, more traditional meaning. As the ice-bucket craze spread across Facebook and Twitter, Ebola began ravaging swaths of West Africa village by village. If these communities also had access to ice and the Internet, they, too, might start their own challenge. Until then, they must rely on the demonstrated humanity of others.

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Goldman Declares The "End Of The Iron Age"

by Tyler Durden

Back in the summer of 2008, when crude seemed poised to take out $150, Goldman decided to declare the start of a commodity supercycle and boosted its oil price forecast to $200. Shortly thereafter crude cratered, plunging to the low double digits, and causing many to scratch their heads whether Goldman was merely taking advantage of the pre-Lehman panic to sell into the euphoria. The same questions, but inverted, will likely follow today's just as seminal note, one which this time calls for the end of a supercycle, this time of iron, with "The end of the Iron Age."

While intuitively this makes sense considering iron ore prices have tumbled nearly 40% YTD and were at multi-year lows at last check with the demand picture going from bad to atrocious, the reality is that a protracted period of deflation in this key commodity will have very adverse implications for not only China, where CapEx amounts to over half of GDP and will likely force the transition to a consumer-driven economy - something the Politburo has been delaying for years - but for the rest of the commodity suppliers countries, with the most negative impact hitting Brazil and Australia. Worse, for a country like China which has thrived on commodity oversupply and overcapacity, the collapse in the equilibrium price driven largely by demand, will mean thousands of suppliers will be left out in the cold and forced to liquidate with massive ripple effects through the fabric of the Chinese economy.

To be sure, for the time being local governments, banks and other SOEs, and the central bank, have been successful in isolating the assorted pockets of deflation that has hammered China in the past several years, but if Goldman is correct and if indeed a iron (and other commodities) are shifting from the "Investment Phase" to the "Exploitation Phase" as Goldman calls it, then watch out below not only China, but the rest of the world as well.

So what exactly does Goldman say?  Let's dig into their latest note:

The end of the Iron Age

Producers and investors have enjoyed a long period of supply tightness, cost inflation and above trend profitability; in our reports we have referred to this period as the Iron Age. In our view, 2014 is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean; in other words, the end of the Iron Age is here.

Iron ore has entered a new exploitation phase

As we have previously argued3, a period of overinvestment in production capacity has ended, giving way to an exploitation phase where supply growth comes mainly from more efficient utilization of existing capacity. Production volumes grow with a certain time lag behind the investment decision; the lag in the mining industry between investment approval and production at full capacity is typically between 5 and 10 years. Based on historical trends, we believe that many market dynamics are reversed in the shift from investment to exploitation, and the current exploitation phase in iron ore could last for a decade (Exhibit 20).

On the demand side, lower prices for iron ore and steel are unlikely to boost demand in a material way. Instead, the day when steel production in China will peak gets  ever closer. In the past decade, the Chinese economy added steel to its economy at a rate three times faster than the US did during the 20th century. On a per capita basis, the average household in China is accumulating steel at a rate equivalent to the purchase of a new car every 8 months (without disposing of its older cars). In other words, the volume of steel stock in China is racing towards the US level of 13 tonnes per person (Exhibit 21). If China is to converge towards the US level, steel consumption will eventually have to stabilize and steel recycling will play a larger role.

On the supply side, the capital stock of the iron ore industry in Australia, Brazil and China increased by US$180 billion during the period 2003-12; this will fuel production growth for years to come (Exhibit 22). Now that the market has transitioned to an exploitation phase we expect new approvals for capital intensive projects to become increasingly rare, largely because the economics of greenfield projects will be challenging in an oversupplied market. However, projects approved in the later stages of the investment phase will support production growth in the years ahead, and low cost brownfield expansions at Tier 1 producers will remain attractive.

Can prices recover once marginal supply is gone? We don’t think so

In principle, the displacement of marginal producers should eventually lead to a balanced market with a high level of concentration among the top 4 miners, raising the prospect of a price recovery further down the road. In practice, we believe that market fundamentals will continue to see supply growth outpacing demand growth by a ratio of 3 to 1 over our forecast period. Not only is the growth pipeline set to deliver several large projects over our forecast period (Minas Rio, Roy Hill, Serra Sul as well as large expansions at Rio Tinto and BHP Billiton), but the supply side will also have many idled mines waiting on the sidelines and ready to resume production should prices recover.

Moreover, iron ore markets went through a 20-year period of declining prices in real terms during the previous exploitation phase that ended in 2004. The iron ore price in 2003 was the same as in 1983 in nominal terms; this is equivalent to an annual deflation rate of 3% in real terms (Exhibit 23). In our view, iron ore prices will display a similar trend of cost deflation in the current exploitation phase.

Cost curves become flatter via the loss of marginal supply and they shift downwards via rising productivity and weaker commodity currencies. Commodity currencies have started to depreciate relative to the US dollar; the weighted average across five of the largest seaborne exporters has lost 16% since January 2011 (Exhibit 24). Given that a majority of production costs are denominated in local currency, this has a direct impact on the level of marginal production costs. On the productivity front, the increased focus on efficiency and the ramp-up of production has already resulted in a modest decline in unit costs among some producers; we expect this trend to continue.

Many moving parts but China remains the key question

The veil on Chinese iron ore production and the level of cost support it would provide to seaborne prices was supposed to be lifted as the market moved into surplus during 2014. But instead of a clear answer, recent data from China only raise further questions regarding the scale of the supply response low prices. In the seaborne market, the delivery of new projects in Australia and Brazil more than offsets the closure of marginal producers. Meanwhile, slower growth in low grade ore supply should see grade discounts normalise.

Chinese riddle: making sense of production statistics

The Chinese iron ore sector is highly fragmented and the data on supply trends is rather limited, but official statistics on price and volume have been roughly consistent in the past: high domestic prices coincided with growth in raw ore production, while market corrections in 2H 2012 triggered production cuts among marginal miners. On that basis, the recent decline in domestic concentrate prices should have led to another deceleration or even contraction in raw ore volumes. Instead, NBS statistics suggest that volume growth has accelerated (Exhibit 3). We find this highly counterintuitive. First, media reports from Platts and other sources indicate that many small mines stopped production from Q2 2014 onwards. Second, a rising volume of domestic ore would be inconsistent with the reported statistics on steel production and iron ore imports which show high growth in Fe supply but low growth in Fe consumption (Exhibit 4).

What does this all mean? We consider the following hypotheses:

• Official statistics do not reflect actual iron ore production. Provincial governments may set GDP or tax revenue targets at the start of the year, and set iron ore production estimates accordingly.
• Official statistics only capture some production. The smallest miners may slip through the cracks if they fall below the threshold used in data collection, preventing the closure of small private mines from appearing in official statistics.
• Production can cut at the concentrator rather than the mine. Mines may choose to suspend sales to concentrators but continue to operate in order to minimize disruption to their operations.

In our view, a combination of these factors could be responsible for the muddied picture, forcing us to look for alternative ways to assess current trends in Chinese iron ore supply. One option is to calculate the implied production of iron ore from statistics on crude steel production and iron ore imports. Taking into account the changes in iron ore inventory and the modest variations in the grade of imported ore, this analysis suggests that Chinese iron ore production on a 62% Fe basis grew during Q1 (partly reflecting limited disruption from a mild winter) before contracting in the following quarter; implied production in the year to July is down 11% yoy (Exhibits 5 and 6). Importantly, the timing of this contraction coincides neatly with the decline in the price of domestic concentrate in Hebei.

Industry sources also suggest that some Chinese supply has been displaced. The MySteel survey shows that utilization rates began to drop in May 2014 when the domestic price of concentrate was heading towards Rmb900/t, with the smallest mines reporting the lowest rates of utilization (Exhibit 7). Meanwhile, the consensus view at a recent conference on Chinese iron ore was that many private mines had indeed closed, even if the aggregate impact on production was limited due to their small size. However, producers also indicated that efforts to expand domestic production are ongoing, as implied by the volume of investment in the sector (Exhibit 8).

Given this wide range of sometimes conflicting indicators, we assume that future Chinese iron ore production would remain roughly stable before mine closures, as new projects and depletion at existing mines offset each other. We continue to assume that the average grade mined in China will remain stable at c. 20% Fe based on a) the reported grade of new projects and b) the fact that closures are likely to affect mines with below-average grades the most. After factoring in mine closures, we forecast domestic production to decline by c.9% per year on a Fe adjusted basis.

Over our forecast period, we expect input cost inflation to moderate as labour markets loosen and suppliers (from consumables to rail and port operators) see margin compression. The depreciation of key currencies including the A$ and the Brazilian real is likely to continue as weaker commodity prices weigh on the local economy. Finally, just as mining productivity began to improve among metallurgical coal producers during 2013, we now expect a similar type of improvement in the iron ore sector. On balance, we apply a 3% rate of annual deflation in real terms to derive our price forecasts for 2016-17 from our starting point of US$80/t in 2015.

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