THE GLOBAL SEABORNE IRON ORE MARKET IS NOW IN SURPLUS: When looking at the 57Mt deficit of supply we saw in 1H22 vs. the 65Mt in surplus we now see in 2H22, despite some supply discipline being displayed, our model now points to a doubling in surplus supply in 2H22 vs. 1H22; resultantly, we have adjusted our forecast for 62% Fe spot iron ore prices to average $85/t in 4Q22E (vs. $105/t prior) and $73.5/t in 2023E (vs. $85/t prior);
UNLIKE PRIOR GLOBAL RECESSIONS, THE CHINESE POLITBURO IS NOT “COMING TO THE RESCUE”: This past weekend, in the face of a collapsing real estate sector (which is VERY important to the world’s second largest economy… considering in China housing accounts for ~78% of consumers’ net worth vs. just ~35% in the U.S.), The Politburo, China’s leading policy-making body, told property developers that local governments are ultimately responsible for fixing the woes in their markets (de facto hinting at their plans to stay on the sidelines as it relates to new stimulus); consequently, unlike the brief iron ore bear market of 2021 (where lower prices were easily offset by an abrupt rationalization of supply from the majors), with Chinese demand weakness much more entrenched, we don’t believe the Australian/Brazilian iron ore majors have the power to support prices this time around – KEEP IN MIND THAT IRON ORE, MORE THAN ANY OTHER GLOBAL COMMODITY, DERIVES ITS SUCCESS (OR LACK THEREOF) FROM EARLY CYCLE PROPERTY ACTIVITY IN CHINA; and
CHINA’S HOUSING MARKET HAS REENTERED “RECESSION” FOLLOWING A BREIF REOPENING REBOUND: Following a nascent two-month recovery in China’s home sales, concerns property developers won’t be able to deliver currently incomplete apartments weighed on housing demand, sending sales tumbling in July; more specifically, sales at China’s 100 property developers fell -39.7% in July YoY to an equivalent $77.6B, or CNY$523.14B.
We have SELL ratings on Fortescue (FMG; A$13.15 YE 2022E PT, or ~50% downside) and Rio Tinto (RIO; $53.56 YE 2022E PT, or ~10% downside; RIO is down -17.5% since our cautious note warning of the risks facing the company published 4/28/22), and see these stocks as two key SHORT plays on the above theme.
