Third quarter production reports have catapulted the big miners higher as they met or exceeded analyst expectations.
This, combined with strong offshore leads and an investment community that is fast becoming less bearish on China provide a near perfect storm for further outperformance.
Ummm, yes, FMG and Rio reported good volumes but BHP missed expectations, which was actually the good news. Unfortunately it re-iterated its plans to expand production 5% in the next twelve months. The three majors are scheduled to increase national production by 8% or so in the next year. Global investment will see total seaborne iron ore production rise by as much as 14% over the same period. Chinese demand might grow 1-2%.
But Potter is not yet done:
And if there wasn’t enough bullish news around, Goldman Sachs released a research report titled ‘Iron age not over: stay bullish and position for the next phase’.
The Wall Street giant said ‘the iron ore boom is not over yet. We remains bullish on iron prices, particularly in the short term, and expects miners to maintain super-normal profits until 2014’.
However, ‘We is more cautious over the medium term as supply growth catches up and China’s breakneck demand growth eases off. We sees prices recovering in 2013, then trending lower as seaborne supply displaces high-cost production in China’.
Yes, high-cost production in China might get displaced. Then again, it might not, as so far has been the case. What might happen instead is that the Chinese will subsidise their local production with an eye to keeping serious downwards pressure on the seaborne ore price. This makes for a quite a neat bailout for its struggling steel sector.
That is not to say that there won’t be displacement. The question is where will the price need to settle to ensure it? Here’s the chart:
Looking at the marginal producers, to do series harm, you’re going to need an ore price at best of $120 over the medium term. And I would suggest lower is more likely given subsidies will happen to some extent. The moment you go higher, there’s plenty of expensive material ready to pour back into the market.
With the price already at $110, $120 is hardly a boom and it is the best case.
My best guess is that the current round of Chinese stimulus will support the ore price for the next half year or so. But each of the next three years brings more new production capacity to market and negligible growth in Chinese demand. Ore is in surplus, sorry.
There are two things that can turn this around. A new Chinese mega-stimulus. Or, a sizeable reduction in seaborne iron ore production expansion plans. It will be the latter in my view. But that also means the boom is over.
If iron ore gets anywhere near $130, I’m going mega-short the obvious player.
