AMP Capital’s chief economist on Evergrande and ASX 200 resource shares

Iron ore’s price volatility is beginning to look more like Bitcoin’s wild moves.

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A miner holding a hard hat stands in the foreground of an open cut mine

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S&P/ASX 200 Index (ASX: XJO) iron ore shares got a bit of a reprieve overnight with the price of iron ore surging 17% to US$109 per tonne.

The way the iron ore price has been jumping around, the price chart is beginning to look more like Bitcoin than a global commodity!

The lift has helped drive 2 of the 3 ASX 200 iron ore giants into the green today.

The Fortescue Metals Group Ltd (ASX: FMG) share price is up 1.3% and Rio Tinto Ltd (ASX: RIO) is up 0.5%.

The BHP Group Ltd (ASX: BHP) share price has given back its modest lunchtime gains and is currently down 0.3% for the day, at $38.56 per share.

What’s lifting the iron ore price?

The big boost in ore prices offering a tailwind to ASX 200 iron ore miners was likely spurred by news that China Evergrande Group (HKG: 3333) would make good on the interest payment it owes bond holders today. Many analysts had been forecasting a possible default, putting pressure on iron ore prices.

As reported on Tuesday, Evergrande was due to pay roughly US$83.5 million (AU$116 million) of interest on its 5-year dollar bond today.

If that sounds like a lot of interest to pay, it is. That’s because Evergrande is has approximately US$300 billion worth of liabilities.

AMP’s Shane Oliver on Evergrande

Presenting at AMP Capital’s webinar yesterday, Shane Oliver, head of investment strategy and chief economist at AMP Capital shared his insights into the Evergrande crisis.

Oliver said:

People are worried about some sort of Lehman moment. I think it’s a risk. But at the end of the day, I think it’s not something major Western banks are heavily exposed to. Nothing like the situation with Lehman. The bigger risks are if it goes bust in an out of control fashion that led to liquidation of all its assets.

According to Oliver, this would likely lead to “sharp falls in property prices in China and a flow on effect to other property developers as Chinese lenders” cut back their willingness to pour money into real estate. He said this “could lead to a major problem for the Chinese economy”.

However, Oliver doesn’t expect this to happen, saying the Chinese authorities will likely sort that out. At the moment, they want to send a message to property developers not to take on too much debt, he believes.

“At the end of the day, they will support their economy. Not with a bailout for China Evergrande, but some sort of restructuring… which minimises the fallout,” he said.

What about other ASX 200 resource shares?

Oliver expects that, “ultimately we’ll see more stimulus coming out of China, which will help support commodity prices”.

While falling iron ore prices are unlikely to return to US$220 per tonne any time soon, Oliver noted that they’re still historically high. And still high enough to make the big miners profitable.

But it’s not all bad news for ASX 200 resource shares.

Oliver pointed out that “gas price and coal prices are all at very high levels. As well as aluminium and copper; all very strong.”

Taking iron ore out of the picture, Oliver said, “In fact, there’s good reason to believe a new commodity super cycle has begun, which should benefit Australia.”

It should also benefit ASX 200 resource shares like Whitehaven Coal Ltd (ASX: WHC).

On that back of soaring coal prices, Whitehaven’s share price is up a whopping 88% in 2021.

By comparison the ASX 200 has gained 10% year-to-date.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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