A Weak Signal for the Iron Ore Market

The market fell hard yesterday, with the ASX200 down 60 points.

It seems that things are playing out just like he said.

Who’s ‘he’? Slipstream Trader Murray Dawes. He’s just made a presentation explaining exactly why you should expect the ASX200 to fall much, much further. As Murray said in the office yesterday – ‘the market is primed for it’.

If you missed Murray’s presentation, you can watch it here.

The market may be ‘primed’ for a fall from a technical or charting perspective, but yesterday’s move was, not surprisingly, driven by central banks. Although this time Ben Bernanke wasn’t involved…not directly anyway.

Yesterday we mentioned the hawkish tone set by the People’s Bank of China governor Zhou Xiaochuan, and the need for vigilance on inflation. Commodity markets didn’t like it. The iron ore market really didn’t like it and the price fell a hefty 3.1% on the day. Overnight, it fell another 4.4% and now trades around US$133/tonne.

That flowed through to the mining sector. One of the world’s largest iron ore miners, Rio Tinto, fell over 2%. Its share price performance over the past year is not particularly good. More worryingly for those invested in the ‘China rebound’ story, the share price performance over the last month is not good at all.

Rio Tinto – Signalling Weak Iron Ore Markets
 

Rio Tinto - Signalling Weak Iron Ore Markets

 

Yet iron ore prices are still around US$133/tonne. That’s very healthy. But Rio’s share price, and that of the other iron ore miners, is telling you that lower prices are ahead.

That’s not good news for Australia’s terms of trade and national income. By the way, the recently released national accounts tell us that in the three months to December 2012, ‘real net national disposable income’ fell 0.1%. It’s a broader measure of Australia’s economic performance from the standard GDP figure you read about in the press, and it incorporates the income boost or otherwise from Australia’s terms of trade.

Because Australia relies so heavily on iron ore for its export income (it accounted for 25% of all merchandise exports in the month of January) what happens to the iron ore price matters.

And what happens in China matters to the iron ore price. Which brings us back to Zhou Xiaochuan. If he’s making noise about wanting to contain inflation, that poses a risk to ongoing massive growth in fixed asset investment, which has been supported by very easy money in China.

That means less steel production (China is already suffering from excess steel-making capacity) which means less demand for iron ore and coal. Taken together, iron ore and coal accounted for 42% of Australia’s merchandise exports in January. Oh, and China took in a massive 34% of our exports in the first month of the year too.

One country taking one-third of our exports…hmmm.

So you can understand why the market didn’t really like Zhou’s comments. (Although it has promptly forgotten about them again today!)

Regards,
Greg Canavan
for Markets and Money

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From the Archives…

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What the Shale Gas Revolution Could do to LNG Prices
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Politicians Are Clowning Around With Your Wealth
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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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