BHP dips below $42 as China iron ore boycott news hits market; dramatic sell-off not evident for now

BHP Ltd (ASX:BHP), one of the ASX’s ‘Mag2’ (alongside Commonwealth) and the world’s biggest miner (depending on how you measure it), has dipped -2.3% in early Wednesday trades on news China has expanded an effective boycott on BHP iron ore products over what is believed to be a contract pricing dispute.

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As I covered in last week’s HotCopper Wire podcast episode, Chinese steel mills were reportedly encouraged by the Chinese government to halt orders of one class of BHP iron ore product over disagreements about price. For context, iron ore futures are currently hovering around US$105/tn.

But now, that effective order on Chinese steel mills appears to have been expanded to all iron ore products BHP sells to China – as for its Aussie iron ore operations, by far the largest and most important trading partner the company’s got.

The economic implications, assuming this situation remains the quo for some time, aren’t fantastic. Especially not for Western Australia, which in turn really is an all-important engine room for the national economy.

Worst-case scenario, if there’s less FIFO money getting around, maybe we’ll see local (West Australian) house prices cool down the road. Or maybe we won’t.

All in all, it’s not the world’s best way to kick off Q3 for a traditional export-based resources economy. While we haven’t seen BHP shares slaughtered on Wednesday morning by any means, it’s not great for the company’s 1Y returns, which are currently negative, just south of -5% compared to last October.

What this situation also poses is a taste of what may be to come. Rio Tinto is building its West African Simandou iron ore project, which is widely seen as an existential threat to WA’s iron ore economy, which is perhaps best evidenced by the fact that Rio Tinto keeps insisting that it isn’t an existential threat to WA at all.

BHP last traded at $41.75/sh heading towards Wednesday lunchtime.

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