Some fun times have arrived. I’ve been banging on about the iron ore sector for ages now.
We got a nice move across the sector yesterday. Fortescue Metals Group Ltd [ASX:FMG] went up more than 3%. That’s a tidy move for such a big stock.
What’s going on? An unexpected catalyst, indeed — at least for me and most across the market.
The Chinese central bank is dropping the reserve requirement for the Chinese banks.
This is signalling to the market that credit growth out of Beijing might heat up again.
Some background helps here. Previous to this move, the Chinese ‘credit pulse’ was looking anaemic at best.
The implication was less infrastructure spending. Therefore less demand for steel and…you guessed it…a falling iron ore price.
The catch with this line of thinking was that the iron ore price surprised everyone and went up despite the limp credit pulse.
Now we might have more fuel for the fire coming. Watch this space.
A man called Ben Cleary is a fund manager.
I have seen him comment on iron ore a few times in recent months.
He forecast it to be strong when many others were negative…so I tip my hat to him and give him the benefit of the doubt.
The Australian Financial Review quoted him yesterday as saying…
‘“Demand for iron ore outside of China is at its highest point in a decade and while slowing Chinese credit growth threatened prices, this has now been rectified, so where’s the supposed hole in demand going to come from?” he said.
‘“Cost inflation is going through the roof, so all the major miners are probably going to produce less than they have told the market, so supply will be lower than expected.”’
We’ll see about that. But as it is right now, the margins that iron producers can make are extreme…and steel is booming worldwide.
Many are wary of buying at the top of the market. But it’s not clear when this party slows down.
Private traders like you and I have the flexibility to surf this wave while it lasts…and peel off if it peaks out.
There’s a suite of juniors hustling to get into production.
One that has been knocking it out of the park is Fenix Resources Ltd [ASX:FEX].
It’s doubled in price since the low point it hit in March. It’s up 600% since last year.
My subscribers got some of this action — but not as much as I would have liked.
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I’m not saying buy FEX now either.
But here’s why we care now…
The team at FEX has set the benchmark for both operational excellence and the cracking return you can get riding a junior miner from the development phase to producing revenue.
You don’t always get a raging bull market in the relevant commodity simultaneously, either.
But the market will hunt similar projects with equivalent timelines and costs etc, to FEX while iron ore stays high.
There’s one worrisome glitch in this dynamic. Is there enough labour and companies available for all these iron ore dynamos to get going?
It’s getting mighty competitive over there. And the cost of shipping is skyrocketing too. It sure isn’t dull, either way.
But there are always risks with any trade.
Interestingly, I was doing some research yesterday and saw one of the big South Korean steelmakers has been buying into an iron ore junior…suggesting they are conscious of staking out future supply.
Now a firm like that has a much longer time frame than you and I are likely to have.
But again, it hints at this idea that the iron ore market is constrained on the supply side.
Analysts told the big iron ore miners that consumption would peter out once China hit a billion tonnes of steel a year. It hasn’t…but you can’t flick a switch onto a mine.
They take a long time to develop if you even have a decent resource identified in the first place.
You can also take a slightly different view of this. The profits and wages showering down across Western Australia will be like a lighter and a tank of petrol for the property market.
There’s going to be a lot of cashed-up buyers as this plays out.
To give you an idea of how insane this boom is, Fortescue Chairman Twiggy Forrest is about to get a dividend cheque for more than $2 billion.
Talk about cashing in!
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.
