Dividends and Iron ore, gold are softening the effects of the pandemic on Australia’s economy

When you think about Australia it is natural to think about the beaches and the cities, but much of Australia is rural and there are areas where iron ore (raw material to make steel) and gold are to found in great quantities. In an article by Clyde Russell of Reuters, he noted Australia is the world’s largest exporter of LNG, coking coal, and ranks second in thermal coal. It is also the biggest shipper of iron ore and the world’s second largest producer of gold.

When the economy of China picks up, the economy of Australia is not far behind. Many of those resources go to China to feed the manufacturing concerns.

Iron ore demand has been rising from 852 million tonnes in 2019-20, to 893 million in 2020-21 and 912 million tonnes in 2022. The Australian government forecasts the price to be in the $77 to $78 a ton while spot prices have risen to $103.50. The difference is understanding China buys 2/3 of global seaborne iron ore. When the big powers of China and the US have trade wars, all the other countries around the world are affected one way or the other.

In terms of gold, with the rise of COVID, the price has increased to $1,781.20 an ounce, although government forecasts are expecting $1,587 an ounce. The government expects Australia to produce 418 tonnes in 2020-21 which is an increase from 362 tonnes in 2019-20. Revenue will jump to $32 billion from $27 billion.

Linking to dividend paying stocks, with companies engaged in raw materials the decision process is much easier, who are the customers? how much resource is in the ground and can it be taken out for a profit? what is the price needed to make a profit? Is the price above that level and is is sustainable? If the answer is yes, you may wish to invest in it. If the answer is no, find other alternatives, but put on your watch list if the prices move up. Investing in raw material companies means continuing to update your research on prices and profits and which companies are the best choice. Some of the companies in Australia have a very low base price they need to produce a profit. Sustainability can mean a variety of things, but in investing it means can the company consistently make a profit?

There are more questions than answers, till the next time – to raising questions.

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