Boom, Baby, Boom, Everywhere — Iron Ore Stock Outlook
It’s hard to concentrate on anything else except iron ore at the moment. It hit US$230 a tonne yesterday in China.
That’s an astonishing run. Iron ore stocks rallied hard yesterday. No doubt they’ll be some fun today too.
It’s worth remembering, however, that iron ore is not a cryptocurrency. It cannot run up forever without a real-world consequence.
Eventually, the input cost for the steel mills gets too high and they’ll lower their bids. At what point does that come?
Your guess is as good as mine at this point.
Iron Ore Stock Outlook
It’s also hard to say how much speculation is going on in the iron ore stock futures and what percentage is genuine demand.
However, Chinese steel margins ARE high. So it’s not unreasonable to think the price could stay above US$200 for some time yet.
It’s a supply issue too, remember. Very few new iron ore mines have come into production in the last few years.
So the existing producers get to cash in while the going is good.
Rest assured, at these prices, anyone with a lease and decent resource is scrambling to meet the market. There are plenty of iron ore juniors doing so now.
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The question, as ever, is: Are you a trader or a long-term investor?
Take a project called Razorback from a small iron ore junior called Magnetite Mines.
They have a huge iron ore resource in South Australia. The company is run by respected iron ore industry veterans.
The catch is they won’t be in production until 2024. Do you dare invest off today’s price when you won’t see a dollar of revenue for three years?
You can make an excellent case for it…if you have the stomach for the dips and down periods along the way.
After all, the steel industry is unlikely to disappear anytime soon.
We know the next five years could see prodigious infrastructure spending all over the world.
And think of the journey of Fortescue Metals Group Ltd [ASX:FMG] from the last iron ore boom to today.
It went from a 5-cent minnow to yesterday’s close of $24.79 — with billions paid out in dividends along the way.
Why can’t this happen again?
I’m not saying that Magnetite Mines will be the next Fortescue. Only soothsayers know the future like that.
But it is worth putting some thought into the idea that the current iron ore boom is not a ‘spike’ but a period of structural undersupply that could take years to find balance.
The marker says that line of thinking is wrong. Most forecasters expected, at least a month ago, for iron ore to peak in the Chinese summer and begin losing steam later in the year.
The ripping moves in the last few sessions now have some wondering if the party keeps going until the end of the year.
We’ll see. But iron ore would have to fall way back to stop the juniors from pushing ahead with their operations.
Anything over US$150 and there’s money in it for nearly anyone.
Of course, we also have the constraints of the real world aspects like truck drivers, staff and port access.
That suggests Western Australia is going to start hoovering up workers from all over the country as long as they can clear the borders and COVID cheques.
Wage Inflation Ahead
Wage inflation is bound to show up in a constrained market with so many resource sectors absolutely flying.
Goodness knows iron ore isn’t the only thing ripping. Copper is absolutely roaring as well. It’s gone nearly vertical in recent trading.
My oh my, what a boom Australia is in for in the next few years. Think of the gains that could come in housing too.
I read yesterday about a bitcoin trader that just bought a $13 million house.
As predicted here in these pages, crypto profits are going to turbocharge this housing cycle.
You might have heard about the huge surge in bitcoin. Now its fellow crypto Ethereum is soaring too.
Odds on we’ll hear about Ethereum millionaires in the same way we do bitcoin ones.
It’s boom, baby, boom, everywhere you look.
Editor, The Daily Reckoning Australia
PS: Don’t forget to check out the latest presentation from my colleagues Ryan Dinse and Greg Canavan. One of the things I’m tracking is for cryptocurrencies to leech into the housing market.
Ryan and Greg are imploring everyone to listen that cryptos are leeching into EVERYTHING. Make sure you see what they’re saying now by going here.