The Pin-Up Stock of the Iron Ore Boom

Get ready for a rally in the iron ore price.

That’s the simple conclusion we come to after looking at the headlines of the past few days. It seems just about everyone (except Fortescue Chairman Nev Power) now thinks prices could head even lower. They’ve fallen 11 days in a row. The spot price now trades below $90.

This wave of bearishness means you can probably expect to see a counter-trend rally, for a few days at least. But it’s a rally we would happily sell.

Fortescue, because its life depends on it, thinks iron ore prices will head back to US$120 a tonne in a couple of months. Apart from hope, the reasoning behind that analysis is that China will come to the rescue with more spending measures which will boost demand for steel and therefore iron ore.

It’s a delusional theory.

If there is anything that China is happy with right now, it’s a falling iron ore price. Why would you think they’ll do anything that supports a return to levels that make their steel mills even more unprofitable than they already are?

Every boom has its pin-up stock. The brash, high growth, highly leveraged player who is going to do better than all the rest. That is Fortescue. Then, the bust sets about taking it down.

But not before providing periodic injections of hope. With iron ore prices having fallen about 20% in the past two weeks, the least you can expect from Australia’s favourite bulk commodity is a little bounce.

That’s it from us on the iron ore front. We’re over talking and writing about it and we’re sure you’re over hearing about it. Let us finish by saying we don’t expect a sustainable bounce back in iron ore prices from these levels. With hundreds of millions of tonnes of the stuff to come on line in the next few years, supply will keep iron ore prices down.

Yes, Australia will still export the stuff, but it won’t contribute the revenue, national income, taxes etc that it has for the past few years. In 2003, iron ore sold for around US$20 per tonne. It bubbled up to US$180 per tonne in 2011. From that perspective, the current price of US$90 per tonne, although causing anguish in Canberra and the Pilbara, looks about right.


Greg Canavan
for Markets and Money

From the Archives…

The Gold Sub-Standard and the Inflation Cake
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BHP and Rio: Just Following the Followers
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How Media Regulation is Just a Clamp Down on Freedom of Speech
22-08-2012 – Dan Denning

Monarchs, the Masses and Democratic Mayhem
21-08-2012 – Bill Bonner

Why China’s Crack-Economy Needs a New Fix
20-08-2012 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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Meanwhile back in the green room where reality prevails – China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses. The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home. Ergo, if you are looking for common sense from Australia’s pin up miner,… Read more »
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