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.
for The Daily Reckoning Australia
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