Ore looks vulnerable, again

Iron ore has had a nice bounce since the October rout of last year but there are signs that that has run its course and new weakness is appearing across the charts. For a start, the spot price itself has rolled over and is accelerating downwards:

Next, a look at the 12 month futures is more unsettling:

There are a series of lows to retest beginning with $125.43. If that breaks it’s on $118.75 and then the ultimate bottom. The 12 moth contract has been a good leading indicator of spot weakness.

To my mind a retest of some of these lows is likely two reasons. The first is the following chart of Chinese port stocks, which shows the seasonal rebuild has run its course:

And if we look at a longer term chart, you can see these levels are setting a new record for inventory:

Which does not combine well with the second reason. We’ve had a series of indicators suggesting that January marked a continued slowing of the Chinese economy notwithstanding the effects of Chinese New Year. The degree of this slowdown remains uncertain but my view is that it is probably worse than consensus thinks at the moment. I don’t foresee a hard landing so much as bumpy one with difficulty getting back off the ground. Bursting asset bubbles come with balance sheet recessions and even in China, where the boom in the use of capital per capita will continue, that means a protracted slowing. I expect iron ore to struggle at least until mid year and maybe longer, depending upon the gumption of Chinese policy-makers.

Comments

    • Would it not mirror the mining sector, which in this country is a large portion of our overall market.

      • Houses and Holes Peter – that’s what you get when you purposely hollow out your economy and share market…and super…and debt markets…and currency…

        Fortescue and OZ Minerals report today – will be interesting to say the least if the falls in spot iron ore translate to “truckloads” or “van loads” of profit.

      • Prince I want to make it perfectly clear that I wasn’t having a shot at you, I merely expressed my view that as a major player in mining we must by necessity have an index that is heavily trended by the price of our major ore production.

        A comparison to iron ore spot prices may well give you a head start on the market, but not by many days i suspect.

        I agree with yoour other point. I have recently watched a documentary on the production of fine porcelain in China, which they dominated in the 18th century – now it is produced by many countries.

        The same will happen to our ore production. What we now take for granted will only have a short horizon in the grand picture, and energy production, and the way in which we utilize our resources will change rapidly as technology changes, and we probably won’t see it coming.

        So creating a diverse economy is a target for now, not the next decade.

      • Peter, you tell us that the mining industry/fifo/industrial construction is going to be the savior of the Australia housing Industry but now you seem to be saying that this may not the case so does this change your view on a flat market housing market with no heavy falls?

      • Peter, you tell us in previous posts that the mining industry/fifo/industrial construction is going to be the savior of the Australia housing Industry but now you seem to be saying that this may not the case so does this change your view on a flat housing market with no heavy falls?

      • No shot taken Peter, sorry if I came across as dismissive, merely replying in kind.

        I’ve covered the effect on the ASX8 before – and as someone who literally lives by the moves in the marketplace I know the effect of mining companies and commodity prices upon index/share prices.

  1. you have said yourself previously — well let me paraphrase 🙂 — that you’ve had your pants pulled down by iron ore in the past so lets just be a little bit cautious and consider a few things:

    Firstly your bearish prism is revealed in the opening sentence. A rout? The price went from a level where miners were making truck loads of money to a level where they were still making truck loads of money — just needed less trucks 🙂 the point being the October low was a hugely profitable price. A rout perhaps if you punt futures but not for miners.

    Your own charts show that an explanation for the “rout” late last year couldn’t be found in the inventory build at ports. Why should we be looking there now? As a matter of fact was there ever a satisfactory explanation for the drop in spot price and the swaps?

    On an unrelated not I’d like to be seeing port inventories as a % of total imports. Seems to me that as import volumes increase you would expect to see port inventories increase — without that having any bearish message.

    • Dear oh dear, Towelie, you’re even more defensive on this topic than others. A 33% price drop is a rout. It says nothing about profits of course which is why I say nothing about profits. I’m covering the market price.

      The inventory charts clearly show a big dip during the price ROUT of last October and a big rebound following. Sure, inventory has been growing over time as port capacity expands but that’s not what I’m addressing. It’s clear that there’s been a big rebuild recently.

      All that gettin’ high is making you paranoid, Towelie.

      • If you zoom in on something it can look big. Zoom in on an ant and it looks like a monster. If you zoom in on a drop in inventories it can look like a “big dip”. Your long range inventory chart puts the “big dip” into perspective however. And when you view the long range charts of inventories and spot price it is a case of having to look elsewhere for price drivers.

        The other benefit of viewing the long range chart is that it shows two previous dips in inventories beginning Sept 09 and Sept 10 (Sept 08 of course was exceptional) that were larger than the “big dip” last year. If you zoom on them it will look like the grand canyon.

        The port inventories are not driving this. You’re grasping at straws. Nothing to see here, move along.

      • Keep telling yourself that.

        I have both long and short term charts up there.

        I’ve argued ore looks vulnerable to a price correction. That’s all. The charts suggest it. The macro environment makes it look quite possible in both theory and practice.

        Not sure why you need to defend the iron ore price. Perhaps you can tell us?

      • If you are confident that port inventories are a key price driver — I am saying they are not — put up a chart overlaying 5 year iron ore prices with 5 year port inventories and let readers decide how port inventories and spot price are correlated.

        it is not a case of me defending the iron ore price I am pointing out that your conclusions are not supported by the data you have presented.

      • Who said it was a key price driver? It’s circumstantial evidence that fits a macro picture, as well as chart and price weakness. Are you saying the seasonal rebuild is neither evident nor over?

      • well actually it would be an indicator of some other underlying driver.

        …but we’re going in circles. it doesn’t matter how you want to frame this, I am asking you to present the circumstantial evidence — let us see how inventory levels correlate with price if that is the evidence that you are claiming is underpinning your story today.

        There is no evidence in this article because we have a long inventory time series and short price series. Rather than grasp one event to torture some sort of conclusion show us what has happened to price when similar such inventory events have occurred in the past.

        in other words be an objective impartial analyst.

      • readers can go to the iron ore link on the right and do the following:

        1. click “interactive chart”

        2. click on 5Y timeline.

        3. in the “add comparison” box insert CIOITTAL:IND

        4. sit back and observe that port inventories have no correlation with spot prices.

        Will you add this chart to this article?

        thanks.

      • Yes, they can. And if they do so using a time frame that doesn’t make the ore inventory movements imperceptable, they will find many dips in the ore price are correlated with inventory draw downs at the ports.

        I’m not sure why I’m bothering with this. Port inventory is used by most major investment banks as one indicator among others for gauging where we’re in the ore demand cycle.

      • the bloomberg interface allows you to click a wide range of time frames so readers can do this to their hearts content.

        and to return the full circle, the appeal to authority about most major banks is irrelevant — do you know that their interpretation is the same as yours?

        e.g. most major banks may use some sort of charting method. That wouldn’t make my conclusions about charting valid. So claiming that an authority uses the same data doesn’t validate your analysis of that data.

  2. “The 12 moth contract has been a good leading indicator of spot weakness.”

    Moth futures. I love it.

  3. HnH, Towelie’s comments are accepted industry analysis. And with Australian costs probably around 50$/t there’s a lot of margin. Obviously the engineered slowdown in building construction is working in China but brokers are still forecasting supply to struggle to keep up with (lower) demand – Indian exports still declining and domestic Chinese grade decline. The price will depend on how much Chinese supply is pushed out by all the new annouced supply and presumably it’s going to be lower than to-day’s.

  4. I agree with both your points and Towelie’s inventory import ratio. The economists are divided on capital misallocation with optimists relying on early stage ecomonic development and high growth to win through others saying we’ll see a repeat of 1998 non performing loans and financial repression of the taxpayer.

  5. I don’t foresee a hard landing so much as bumpy one with difficulty getting back off the ground.

    The PBoC is at the controls of JAL flight 123. They are pulling more levers than Paul Keating. Flaps up, flaps down, throttle up, throttle down, plane gyrating madly, airspeed and altitude oscillating uncontrollably … and there’s a mountain range ahead.

    The Australian economy is on this plane.

    Controlling the plane was very difficult as the airplane experienced dutch rolls and phugoid oscillations (unusual movement in which altitude and speed change significantly in a 20-100 seconds cycle without change of angle of attack).
    The aircraft started to descend to 6600 feet while the crew tried to control the aircraft by using engine thrust. Upon reaching 6600 feet the airspeed had dropped to 108 knots. The aircraft then climbed with a 39 degree angle of attack to a maximum of approx. 13400 feet and started to descend again. At 18:56 JAL123 finally brushed against a tree covered ridge, continued and struck the Osutaka Ridge, bursting into flames.

  6. RineSoft Corp. is pleased to announce the release of MineBot 2.0 (codename “Towelie”).

    An unidentified RineSoft spokeswoman said that “Towelie has been in beta testing for a few months now at various anti-mining blogs, and we are very pleased with the results”.

    MineBot 1.0 (codename “3d1k”) will continue to be deployed across the blog-o-sphere in parallel with “Towelie” for the remainder of 2012, when performance analysis will be conducted.

  7. Well any further price decrease in iron ore will mean there goes Swannies budget surplus, 1% company tax decrease, cost of increased Super. Have I missed any other giveaways promised as a result of the windfall expected from the mining tax?