Fortescue Finds Pilbara Iron Ore But Price Correction May Be Coming

Oh to be Andrew Forrest this Friday morning. Twiggy’s little iron ore venture just keeps getting bigger. Fortescue Metals (ASX:FMG)—yet to ship any commercial iron ore to China—became the third-biggest iron ore player in Australia with yesterday’s news.

What news? The company announced an upgrade in its resource base of nearly 40%, which sounds less impressive than one billion tones of new iron ore in the Pilbara. The total resource of iron ore is now 2.6 billion tonnes.

Driven by the resource boom, the stock keeps going up. Investors are confident China’s long-term demand for Australian base metals is as fixed as the stars in the sky.

Speaking to the Melbourne chapter of the Australian Technical Analyst’s Association last night, we voiced the possibility that in the midst of China’s great cycle of industrialisation, there will be some vicious corrections. When will the first one come?

The long-term trend in China—measured in decades—is for higher per capita incomes and growth wealth. But in the short term, China’s demand for iron ore is probably a lot more volatile than many folks have considered. The fixed asset investment boom in China has undoubtedly led to a lot of mal-investment (unoccupied commercial real estate, bridges and roads to nowhere).

Again, in the long-term an economy cannot function without the kind of physical infrastructure China is building at breakneck speed. But operating at breakneck speed inevitably leads to accidents. Watch out for those. And with the nearly universal bullishness about resources and ore, our inner contrarian is whispering to be mindful of corrections and to be prepared for them.

Dan Denning
The Daily Reckoning Australia

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