Mirabile dictu: MS says short Fortescue

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Now they’re getting it. From Morgan Stanley today:

We believe the share price will fall in absolute terms over the next 15 days.

This is because the stock has traded up recently, making short term valuation much less compelling. Data points from the Chinese steel industry suggest the recent restocking cycle may be concluding. Total steel inventory of traders and mills combined has dropped below 12 days of production, down from the peak of 17 days in February, which suggests demand has eased as we enter the slow season. Also 37 days of iron ore inventory at ports is the normal operating level and with many mills are facing tight financing conditions elevated physical positions are unlikely. As such we see the potential for the iron ore price to trade lower; the 62% index price above our 3Q forecast of US$93/t. A declining iron ore price would lead to the Fortescue share price declining also in our view.

We estimate that there is about a 60% to 70% or “likely” probability for the scenario.

Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.