The ferrous complex was still enjoying its bear market rally on September 26, 2021 as spot firmed, paper went silly overnight but steel fell on the week:
There is no change in the outlook. I still expect iron to keep falling to $60 soon. Indeed, the risk grow to the downside of that price the longer that China holds out in its property developer develeraging campaign:
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- housing construction to keep slowing;
- output cuts to jam that weakness swiftly into raw marterials supply chain;
- global supply still advancing.
I expect coking coal and steel prices to crash next.
In news, the charge of the iron ore losers is turning into a stampede. Courtesy of an always willing AFR:
“I wouldn’t get caught up in the huge fluctuations,” Fidelity portfolio manager Paul Taylor says. “The long-term assumptions are more important and we’ve got the biggest low-cost producers in the world.
…Both BHP and Rio also offer good exposure to several base metals still soaring amid the push towards electrification.
In fact, SG Hiscock’s Australian equities fund has ditched its position in Rio and switched to BHP because of its exposure to commodities such as copper, potash and nickel.
…Macquarie is bullish on all local iron ore producers it covers, with “outperform” ratings on BHP, Rio, Fortescue, Mineral Resources, Champion Iron, Deterra Royalties and Mount Gibson Iron…“If Chinese housing new starts rebound in 2022 and the power shortages ease in China, the demand uptick could drive a rebound in iron ore prices, particularly given ongoing global supply hurdles.”
In a note to clients on Wednesday, Citi upgraded its rating on Champion Iron to “buy” from “neutral”, saying the pressure from the iron ore price fall had created a strong value opportunity.
“China lead indicators are stabilising and have turned up off recent lows,” McTaggart says. “The fact steel prices have stayed high points to apparent consumption being driven more by state-imposed production cuts than weakness in underlying demand.”
Well, whatever leading indicator they are looking at, I suggest they get some new ones. Just read this.
There is no global difficulty in lifting iron ore supply. Cripes. Vale is coming back and the Pilbara will keep grinding higher. There’s a glut problem.
As for cost curves, that Pilbara producers are cheap means the price has to fall a lot further amid the glut. Only shaking out supply will stabilise prices. That won’t happen in any volume above is $60.
It will change if China stimulates. But, at this stage, there is little indication that it will be enough as the structural campaign to break property developers unfolds.
On other metals, who cares. They’re not big enough to matter to earnings, are also at bubble highs, and are still heavily exposed to Chinese property. Copper upside from electrification is small.
Finally, miners are still far too cheap on NTM P/Es to buy. Yes, too cheap:
Commodity down cycles bottom out when miners are expensive as the market starts to extrapolate unsustainably low prices.
We are at the polar opposite right now.