Most people quote Warren Buffett for investment wisdom…and not marital advice.
Today’s Fat Tail Daily will source the latter to inform the former!
What’s the story?
A while back I saw a YouTube clip of Buffett giving a speech. It included this line…
‘What’s the secret of a successful marriage?’
Buffett paused for the crowd to think about it.
He answered his own question:
‘Low expectations.’
Cue laughter and merriment. That old charmer!
No doubt, there’s a grain of truth to what he says about marriage. But I love the idea when it comes to the markets.
What do I mean?
Low expectations usually mean cheap prices on offer…and less risk.
If nobody expects anything good to happen, they won’t bid on shares in the industry with any enthusiasm.
That can, at times, open a window of opportunity.
That’s worked for me before.
Let me elaborate how iron ore could be that opportunity for 2025.
You see…
I’ve been around the ASX a long time now.
Every year, I can guarantee you something will be the same.
It’s this…
The consensus on China’s economic outlook is a bit grim, with iron ore price poised to fall.
It’s as Australian as the Melbourne Tennis Open and cold beers and prawns for Christmas around this time of year.
I’ve followed this sector for a long time too, filing away articles of interest into a software program to look back on from time to time.
Let me share with you something I noticed when I went through these articles over the last week.
Practically every single one mentioned China’s property slowdown/crisis/deleveraging. It’s a never-ending source of fodder for the business news.
And practically every single one of those articles quoted an investment bank or bearish commentator expecting the iron ore price to be well under US$100 a tonne by now.
What do we see after all this endless glooming and dooming?
Iron ore is still around US$100 a tonne.
This is a solid price, if not spectacular.
You might be surprised to know that Chinese iron ore imports hit a record high last year…1.24 billion tonnes of the stuff.
Naturally, today, the consensus is this or the current iron ore price won’t last — despite it lasting for years longer than most expected.
Here are the bearish indicators this year:
- High inventories in China
- Weak Chinese growth / steel demand
- The Simandou Guinea project going into production.
Hmmm…let’s take a look at it all.
Yes, it’s true on point one. Inventories in China are elevated — 150 million tonnes at last check. That’s high for this time of year, and in general, no question.
The last time they were this high was 2018…and iron ore got dumped until a massive supply disruption out of Brazil.
If buyers and traders draw this down aggressively, it could cut the need for them to bid for seaborne supply.
We can’t be dismissive of this. That said…
What about steel demand?
A recent report says steel production has returned to year-on-year growth and some steel inventory levels are around a low for this decade.
Westpac’s Robert Rennie says that Chinese steel production, in recent times, has been contracting about 2% a year. Is a shift happening here?
It’s too early to tell…but a positive observation.
And China’s overall economic growth?
We can quibble about their GDP growth being 5%, 4% or even as low as 2%.
According to strategist David Goldman, we can’t quibble with electricity output. And that rose 6% in 2024 in China.
He says Chinese GDP and electricity output have moved in lockstep for years.
The implication is the Western press is too negative on China.
(By way of contrast, American electricity production hasn’t moved up for years…despite reported GDP being higher.)
China may even come out with stimulus, depending on what Trump does with his tariff policy.
Could a positive surprise play out, albeit tentative?
And Simandou? Yes, this a major source of new supply coming into the market next year.
The question is whether Rio Tinto, BHP and FMG can keep producing at their high level of the last five years? All three have been bang on, production wise, for a long time.
That’s a high bar to keep hitting.
That’s not all…
Depletion is always a problem in mining, and it’s possible the need to replace existing mines starts to affect their output.
For example…
Rio’s recent quarterly showed elevated levels of lower grade iron ore in their exports, in part because of this.
Where does leave us?
We have an interesting set up.
It may be that the bears are right, and iron ore either limps along this year at US$90–100 or weakens, likely after March (for seasonal reasons).
This outcome is what the market is currently pricing in.
However, I urge you to follow developments here.
If, for any reason, iron ore runs higher than US$115 and can stay up there, expect the big miners to run up too…in a big way.
I’m not saying it’s likely.
But it’s the unlikely turn of events that can be most profitable.
I can tell you one thing: nobody thought an iron ore bull was on the cards in 2019 or 2021 either — and that’s exactly what we got, for different reasons.
It’s almost certain when you float an idea like this that people will think you’re ‘crazy’.
Let them laugh.
You may not be right…but I know from experience that the best opportunities for alpha are when something happens that the market doesn’t expect. Then everyone scrambles to reposition their portfolio.
You have to do something out of consensus to get a shift in price in your favour. That’s just how markets work — and why they’re hard.
The reason I like iron ore is that it’s so damn profitable already at US$100 a tonne for the big miners. Anything above that is pure cream straight to the bottom line.
Can iron ore surprise in 2025? We don’t know yet. Let’s start watching now.
I will be — all year.
Best wishes,
 |
Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
PS: By the way, I put down three stock ideas in my latest report. All of them are shaping up for a barnstorming year. Check out what you need to know by clicking here.
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