June 23, 2020
by Rob Zdravevski
Iron Ore – As Good As It Gets ?
Over the past 6 weeks, the price of 62% grade Iron Ore has risen 25%. It’s now trading around $102.
Prices have risen due to a combination of China’s factories and manufacturing returning to a “normalised” utilisation and Brazil shipping less ore.
The previous spike, in January 2019, saw Iron Ore price climb from $75 to $95 within 2 weeks and a subsequent surge to $125 occurred over the next 3 months.
This was mainly due to the collapse of a tailings dam in Brumadinho (owned by VALE), which also tragically resulted in lives being lost.
I can’t quite reason about the cause of the 2nd lurch higher as economies were at the tail-end of a 7-8 year economic cycle.
However, the price normalised back to over the next 4 months as Australian suppliers filled the gap.
<see chart below>
Today, the price of Iron Ore has risen again due to a Brazilian supply disruption aided by “newer news” that Brazil’s COVID-19 environment is worsening.
Once again, Australian iron ore miners seized the supply opportunity yet prices have continued to roar ahead.
It is at this point in time, that I now think, that this is as “good as it gets” for the Iron Ore price.
But I also have the following questions;
- Can Brazil contractually sell Iron Ore to China below prices as seen in the spot and futures markets?
- Is it true that Brazil produces a higher grade of Iron Ore than Australia?
- Will Brazil’s cheaper labour and production give them an advantage?
If the answer to these 3 questions is “Yes”, they then qualify for two of the three “cheaper, better and faster” categories.
Brazil could also be “faster” getting ore to the port, although overall we need to keep in mind that it does take 45 days to ship Brazilian Iron Ore to China when compared to the 12 day journey for Australian suppliers.
Anecdotally, I can’t help speculate that Brazil is feeling the strain of lower export receipts and may start to push product through its ports with less hesitation.
Inversely, it’s naive to think that China’s importers are submissive “price-takers” of sensitively priced commodities.
And so, my analysis of the price action in the Singapore traded 62% TSI contract suggests the strength of the advance is waning, as it makes a “rounding top” of lower highs and lower lows, a change in trend is near and the price traded to extremes on various measures.
The “fat part of the trade” has been seen and I expect it to retrace and trade down to $92.
For those who disagree, I am curious what you think will “drive” the price higher from here and how much risk are you taken when compared to the reward on offer when looking at the whole picture?
Until next time,
Rob
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Drop me an email: rob@karriasset.com.au
Disclaimer
Some extra reading.
https://www.abc.net.au/news/2019-02-12/iron-ore-price-explainer-after-mining-dam-collapse/10800698?nw=0
https://en.wikipedia.org/wiki/Brumadinho_dam_disaster
If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.
Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.
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Those who don’t watch markets closely might be fooled how the media is “framing” the scene.
The S&P 500 did have its best quarterly return in 20 years.
It rose 20%.
But it did most of that work in the first two months.
The month of June only contributed 2% of that return.
Contrarily, it seems that “non-professionals” have a feeling that the market is roaring higher on a daily basis.
It’s not and it hasn’t. The market is still the same price it was a month ago.
In fact, June 8th remains the “post-recovery” high seen in many global equity indices.
July 3, 2020
by Rob Zdravevski
rob@karriasset.com.au