China News Flow: Same, Same…But Different

China News Flow: Same, Same…But Different

Sometimes you just have to laugh in this gig.

I say that because I did something I haven’t done in a long time yesterday. I went to the office!

Why is that funny? I looked at my old desk and its collection of coffee mugs and books and cords.

What was that yellow folder in the top drawer?

‘Hmm’, I say to myself. ‘Newspaper clippings. About what?’

I began to rustle through the wad of articles.

Shiver me timbers! They were about China…going as far back as 2017.

That’s when I started laughing. The stories were all like what we’ve been reading about this year.

You know the ones…

China is a massive credit bubble. China’s developers are on the edge.

The property tax is coming to crush the middle class. Watch out for the China ‘slow down’.

Oh, my goodness, you can pick any year, and it’s the same lines going around and around.

Why is this relevant right now? You heard about Evergrande. You saw the ASX sell down in September.

There was a whisper that it could be China’s ‘Lehman’ moment.

We can’t be totally dismissive. The iron ore stocks have been hammered alongside the iron ore price.

But it does beg the question…has it all gone too far?

Maybe. Maybe not. Iron ore is US$90 on the Singapore exchange.

It hasn’t held above US$100 — something I thought it would do. Iron ore inventories appear to be rising in China (if we can trust the data).

And we know China wants to limit emissions before the Beijing Olympics early next year.

But, perhaps, the market is beginning to look beyond these pressures now?

The good Lord knows there’s plenty of bad news baked into the prices today.

Let’s bring up the charts of the ‘Big Three’ iron ore miners…

Here’s BHP, Rio, and FMG grouped together:

FMG = Yellow, Rio = Black, BHP = Green


Fat Tail Investment Research

Source: Optuma

[Click to open in a new window]

You can certainly eyeball the chart to see the big falls lately.

But you can see a slight uplift beginning to form if you look at the right-hand side.

The least we could say is that they have steadied for the moment.

Now, my general read of this situation is that the iron ore price is sitting exactly around where the market thought it would be in 2022.

This gives us a ‘pivot’ point for some clarity on where things go from here.

If iron ore calls back to $65–70, then the Big Three will fall as well because that’s lower than the stocks are currently discounting, in my view.

But should a surprise bounce hit iron ore, we could see them lift for the converse reason that it would be higher than the market priced in.

They are still quite profitable at this level, if not the superstars they were six months ago.

But don’t forget that this iron ore drawdown has wiped out the immediate prospects of the junior developers.

There’s also evidence to suggest China’s own iron ore industry needs a US$100 a tonne price to remain viable. The current price puts pressure on the domestic market.

Is this what the market is sniffing out?

Possibly, but in no way certainly.

What I like about the Big Three iron ore miners currently is you find out fairly quickly if you’re off base buying them now.

Any sharp drop from here and you know something is off.

But they’ve been so hammered that there are reasonable odds it’s an effective entry point should iron ore rebound.

The odd thing about this current situation is that it was government action that took down iron ore. It wasn’t a market-based move.

Perhaps the strong demand from Chinese mills is still there once the Chinese government takes their foot off the brake.

This is the kind of situation where the news only needs to be ‘less bad’ for sentiment to improve.

We can’t be certain right now.

But — especially if you’re looking for income and can handle a bit of volatility — the Big Three iron ore miners deserve some thought, at
least
.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Don’t forget to check out my funky new podcast here. We’ve already chatted to real estate expert Catherine Cashmore, investing legend Jim Rogers, contrarian value investor Greg Canavan, and my trading mate Murray Dawes. Again, check it out here. It’s free!