Iron Ore – As Good As It Gets

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
Subscribe to my blog: www.robzdravevski.com

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.

It’s not me, it’s always them

Let’s blame Greece for a swoon in Aussie equities.

Now that the Shanghai stockmarket has declined 20%, let’s blame them too.

China is trying to stimulate their economy. Yep, that’s another thing to pick on.

Hang-on, isn’t Australia also cutting rates? Aren’t we in a monetary easing phase too?

Perhaps other countries should blame us for doing something as preposterous as cutting rates and weakening our currency.

When the Chinese equities market doubled in the past year, we should have blamed them too, ‘cause the Aussie market didn’t follow.

Greece’s woes has nothing to do with the decline in the shares of an Australian company such as Boral, Computershare or Alumina.

Australia needs to looks at itself before blaming others for its stockmarket gyrations. It has a high cost labour force, high taxes, internationally uncompetitive manufacturing, higher cost of money and a high cost of living.

Subjectively, our politics of late, hasn’t exactly been clear, stable and welcoming either.

We’ve not had an economic recession for 23 years and we’re still not happy. Always ready to blame somebody else.

Forget the blaming of the other countries. Many of them are performing much better than Australia’s. Our hubris has not prepared us for the reversion that the Australian economy will suffer during the next cycle.

Can You Smell The Deception & Misdirection

This is a periodical post about things that I see in the financial press, which I tend to interpret differently. When managing investors money, you need analyse the news and not just simply read it because you can’t assume you are getting to the truth.

Firstly, Jakarta warns Australia they are prepared to “clash” over border violations incurred by the Australian Navy. Australia best heed their warnings and wipe that smirk off your face because 300 million Indonesians should send your xenophobic fears into overdrive. I hope our government isn’t pinning all of our defensive hopes on U.S. Marines stationed in Darwin?

But equally Telstra is looking to form a 50/50 venture with Telekom Indonesia. Can David Thodey please be our next foreign minister?

I can’t believe why any company in the world wants to pay that much for a small insignificant business such as Warrnambool Cheese & Butter. Good luck to them.

Panic, Panic – protestors block Bangkok streets and the Thai Prime Minister is suspected of corruption. The Thai stock market has risen 9% in 10 days since this story picked up steam.

Alex Waislitz’s Thorney Group raises $68 million. Now I’m not sure what their raising target was but from a distance, their reputation could have easily raised 4 times that amount. My point is, would-be stockbroking firm geniuses should keep in mind that it’s difficult to raise money from the public.

With 65% domestic market share, Qantas still thinks it plays on an uneven playing field.

Franchisee of Australia’s 370 Burger King stores, Competitive Foods Australia, posts revenue of $1.03 billion for fiscal year 2013 and makes $21.4 million profit. That’s a lot of invoices and money to handle in order to make a 2% net profit margin. Last year, revenue was $935 million and profit was $8 million. Hey Jack, I see that cost cutting program is working?

Australian rail operators (in the Pilbra, Western Australia) are complaining that truckers have got an unfair price advantage when they transport iron ore. If trucking iron ore is cheaper than by rail, then the iron ore giants should then give their competitors access to their railroads. Umm, I didn’t think they would.

Various interviewees in newspapers are wishing for a weaker Australian Dollar. Be careful what you wish for. When you see commodity prices rise, it is usually accompanied by a higher Australian Dollar. In Australia we mainly export commodities, ’cause we don’t manufacture things such as cars, televisions or clothes anymore. So if the AUD remains weaker, we can sell US Dollar denominated commodities and receive a lot of AUD once its converted but it’s also good for overseas money to buy up Australian assets (see Australia is “on sale”).

Australia’s stock market falls due to weak Chinese data. Yup, heard this one before. Just like other brokers who actually ask me if I’m staying up late to watch the U.S. unemployment numbers. It doesn’t really affect the earnings of the shares in the companies that I and my clients own but if you need to justify a movement in the stock market with some sort of news, good luck and be my guest. Please continue to manage your investments on the basis of “jumping at shadows”.

Finally, this week, not a single economist who provided an estimate on the Australia Consumer Price Index reading got it correct and Deutsche Bank posted a “surprise” $1.15 billion quarterly loss.

Whether these professionals continually get their ‘calls” incorrect, can’t make money themselves or continue to pay fines for manipulation & price rigging, yet people still give these investment firms their money to manage.

How To Go From Sinophile to Sinophobia – Ask Australia

A country’s Foreign Affairs  isn’t only about setting policy but you need to understand economics in order to achieve your diplomatic objective.

Having a few politicians who are certified Sinophiles isn’t an automatic pass either.

Unfortunately, politicians and their advisors often aren’t financially literate let alone considered to be business people and because of this, they fail to understand how to deal with other countries over the length of many economic cycles.

In Australia’s case, it was the only large developed economy to survive the 2008 Global Financial Crisis. The fact that it has hasn’t posted a year with negative economic growth for 22 years in another anomaly.

Over the past 10 years, Australia’s economy benefitted from China’s appetite for its commodity resources (see China’s stimulus) and we loved them for it but after a while Aussies weren’t happy with what panned out, as the social and financial divide was then blamed on a “Two-Speed” economy.

When a large trading partner saves your economy, you say “Thank You”.

You don’t;

  1. antagonise them by placing U.S. Marines in Darwin and lie about the real reason they are there.
  2. call them dirty polluters (even though you have been one for a 100 years before them)
  3. revile the fact that their students come to Australia to study and “take away places from Aussie students”.
  4. ban their large telecomm networking company from participating in the construction of your own National Broadband Network
  5. obstruct and oppose their companies from buying assets (farms) from a willing seller in a free market enterprise system &
  6. charge their citizens more tax if they choose to buy property in Australia.

Oh Australia, you just don’t get it.

Buy a container of coffee beans

The price of arabica coffee has fallen to 4 year lows. (Are you paying less for your coffee lately?)

While the demand for coffee has remained steady for the past decade, only recently has supply increase, thus explaining the fall in the price of the commodity.

Compare this to the 1,000 cups that each Norwegian or Finn drinks, each year, which is equivalent to about 10 kilograms (kgs) of coffee.

Although Scandinavians love their coffee, the largest coffee market in the world is the United States of America, where it’s averaged that each person consumes 4 kgs per person, each year.

Roasted coffee beans Español: Granos de café t...So where is the upside?

The tea-loving Chinese only drink an average of four cups of coffee, per person, per year.
Just imagine if the Chinese taste buds change as Starbucks and Espresso bars start popping up around the place?

Or perhaps a wider group of Americans increase their coffee intake.
If that story doesn’t pan out, recent studies suggest that drinking coffee can halve the risk of suicide. As mental illness becomes prevalent and should the economy deteriorate again, it’s plausible that drinking more coffee could be added to a doctors prescriptions.

Although that advice won’t help the growing insomniac population, which is a future blog post topic.

So, with prices being low, it’s not a bad idea to go and buy a shipping container full of raw, green Arabica Coffee and keep them for a while.

“Green” coffee beans that are stored in a dry environment can last for up to 10 years.
Furthermore, stored beans are then considered “aged beans”, which over time lower their acidity and increase their body.

Just An Idea!

The numbers say it all

Heard a radio story yesterday that was interviewing a knitwear manufacturer in Melbourne, Australia.
At his factories peak production several year ago, it employed 70 workers and now he employs 20 people.
Why?
To knit and assemble a jumper (sweater for North American readers) in his Australian factory, excluding the cost of the raw material, the cost is between $30 & $35.
In China, the cost of manufacturing the same garment is between $7 and $8, while it’ll cost you a $1 in Cambodia or Bangladesh.
In a globalised world of free trade, it’s difficult to argue against the numbers.
Import Tariffs anyone?

Putting China in context – Part 1

Today, China’s Shanghai Stock Exchange Composite Index (SHCOMP) is trading at 2,200 which is the same level seen in 2011, 2008 and 2006,

You can buy the Chinese stock market today for the same price that it was 7 years ago.

Furthermore, it’s trading at one-third of its 6,124 point high seen in October 2007 with a Price/Earnings Ratio of 11 and Dividend Yield of 2.3%.

Economists are suggesting that for China to move it’s into next phase of expansion and prosperity, the economy would need to move from bing dominated by manufacturing  into one that is driven by domestic consumption. I think this argument is irrelevant.

Sometimes too much analysis can be counter-productive.

I don’t think pundits were wondering when America was going to morph from its industrial manufacturing roots into a consumer society back in 1910. As The Roaring ’20’s came around, it just happened.

Interestingly, many developed economies now yearn for a return of their manufacturing economy.

Recently, the SHCOMP fell 2% because China only reported GDP growth of 7.7% rather than the consensus expectations of 8%. Analysts then expressed their “disappointment” and promptly wrote reports re-iterating their case for a decline in China’s economics.

Many countries could only wish for the growth that China has.

 

Iron Ore prices rise 33%

Did you know that over the past 6 weeks, the spot price of Iron Ore has risen 33% back to $120 per tonne?

Some investors may not believe this as they are still anchored to the bad news they saw last month with headlines such as ‘Iron Ore Prices Plummet”.

Credit to London’s Financial Times who did report the positive news this week.

source: Bloomberg

 

 

 

 

China Needs To Spend Almost $8 Trillion To Cope With Massive Migration

 

China Needs To Spend Almost $8 Trillion To Cope With Massive Migration Of Rural Peoples Into Cities

By Palash R. Ghosh – International Business Times

China needs to spend £5 trillion ($7.8 trillion) over the next two decades as an additional 200 million people are expected to move into the urban centers of the country, a new government report warned.

There are already up to 300 million migrant workers who have taken up residence (often illegally) in China’s metropolises. Many of these arrivals live in substandard housing and toil at low-paying, menial jobs.

The report, entitled “Blue Book of Cities in China” and released by the Chinese Academy of Social Science’s Institute for Urban and Environmental Studies, underlines the massive problems China faces as its population rapidly urbanizes.

Shan Jingjing, a researcher from the Institute for Urban and Environmental Studies, or IUE, told the Daily Telegraph newspaper of Britain that a gargantuan amount of money will be required to provide housing, social welfare and infrastructure projects for the new migrants.

“The rural population currently working in the cities has not turned into an urban population yet,” he said. “They don’t have the same social insurance, housing, education, public service and citizen rights as urban residents.”

The urbanization of China has been an extraordinary, perhaps unprecedented, phenomenon.

In 1949, when the Communists seized power in the country, 90 percent of the populace lived on farms and rural regions. As recently as 1982, only about one-fourth of the people lived in cities.

Now, the urban population has exceeded that of the rural for the first time in China’s history.

Dr. Peter Liotta, a professor of political science at Salve Regina University in Newport, R.I., says the urban portion of the population will continue to climb in tandem with economic growth.

“In the next decade, 70 percent of the China’s population will live in cities,” he said.

“By 2030, China will have 221 cities with populations exceeding 1 million residents each, and its total urban population will add 400 million new residents — more than the entire population of the United States then.”

Liotta noted that Chinese authorities have prepared well for the oncoming crush in its cities.

“China has been thinking strategically about how to handle this astounding increase in population and its accompanying need for capacity resilience and infrastructure support,” he noted.

“China has specific plans for building metro systems, highways and high-speed trains for its top 170 cities. In Beijing, for example, from 2004 to 2006 alone, spending on urban transportation increased over 50 percent. So, for these 170 ‘top’ Chinese cities that are a strategic priority, China will need 28,000 kilometers [17,000 miles] of metro rail lines and 5 billion square meters of paved road — and it is likely that China will achieve these goals.”

Still, China faces some huge challenges.

Liotta indicated that China now has five mega-cities: Chengdu (approaching 35 million residents), Chongqing, Shanghai, Beijing and Shenzen. Many of these cities are new creations.

“The mega-city of Shenzhen in southeastern China (across the straits from Hong Kong), for example, did not even exist prior to 1979 except as a simple fishing village,” he said.

“Today, its population is 14 million. The movement of peasant populations from the west to the mega-cities of eastern China represents the largest — and most rapid — migration in human history.”

 

China – the contrarian

Recently, we have seen Chinese manufacturing and production figures decline and statistics appearing about how many consecutive months they have been decline or below a certain figure denoting a contracting economy.

Streaks come to an end and trends do weaken and reverse.

China’s greater growth cycle is still in its infancy and even more so are its political and economic reforms.

When growth in a country slows, reforms then speed up.

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