1) I left you last week with a contrarian idea to think about: iron ore.
Almost everybody assumes the price will fall below US$100 a tonne and stay there this year.
My take is this could be a tradable opportunity if that consensus is wrong.
Don’t forget that markets look ahead.
Fortescue Metals [ASX:FMG] dropped over 30% in 2024. See here…
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| Source: Market Index |
That was the market jumping ship before Trump came in and potentially hit China. Iron ore dropped sharply into last October too.
Then again: what’s new?
Iron ore and Fortescue are always gyrating around like yoyos.
A few years ago, I used my software package Optuma to track the price swings in the stock for the last five years or more.
What I can tell you is this: practically every year you get a 30% move down in FMG at some point.
It’s as guaranteed as tax time.
Then events push it back up, at least so far.
It’s a very tradeable stock in that regard, with good liquidity. Any surprise increase in iron ore can juice it up…fast.
At least the FMG price today gives us a bigger margin of safety to begin with relative to when it traded up near $30 per share.
Operationally, FMG is in rude health. Their latest numbers came out last week.
FMG shipped a record number of tonnes in the first half of this financial year. They’re on track to meet full-year guidance, with a chunky 10% dividend on offer.
That yield is high for a reason. The market is sceptical on iron ore demand. The market is sceptical on China. And FMG’s lower grades are less appealing long term as we enter the ‘green steel’ era.
Most fund managers in the market who want to go long resources will pick Rio Tinto [ASX:RIO] and BHP [ASX:BHP] over FMG.
Why? Because they can justify it as getting exposure to copper as well, hitching to the theme of decarbonisation and renewable energy.
With this in mind, it’s a wonder Twiggy hasn’t pushed FMG toward copper considering his conviction in getting the world to hit Net Zero.
The problem with iron ore is that it’s perceived to be ‘ex-growth’ because Chinese steel production will likely flatline from here.
Sometimes I wonder if that narrative is wrong.
I have no doubt that Chinese steel consumption will flatline. Whether the world’s consumption will do the same is an open question.
An old miner I followed for a while used to say he thought iron ore was going to US$300 a tonne.
His reason comes from the belief in the huge infrastructure spending from decarbonisation and urbanisation that will take place in the ‘Global South’ in Africa and Asia.
I can’t tell you how likely that is. I can share with you now that a cyclone in the Pilbara just knocked out some of Rio’s infrastructure (surprise surprise), and will likely be out of action for a month or so.
Rio Tinto has maintained its annual guidance but volumes will be down during this period.
It only takes a few glitches like these to send the iron ore market into disequilibrium (caveat: high Chinese stocks are a buffer here).
Who knows? It’s something to watch for.
2) Incidentally, US fund manager Kyle Bass says that China is in a ‘complete financial crisis’.
Yawn. For years I have read this gent spouting opinions.
I can’t remember any of them producing any effect on my account, or anything else.
I’ll give him one thing. He’s a wonder at generating publicity for himself. No utterance seems to go unreported.
In fact, you can probably say that about 90% of people pontificating about China.
Of course, Bass could be right. Yet the very fact that iron ore remains US$100 a tonne seems at odds with his forecast.
China has so far “managed down” their property market without a full-blown meltdown, albeit causing much anxiety for the rest of the world.
It also seems to be dominating the world with its EV production…industrial robots…and more.
Suffice it to say, time will tell. For now, China seems more likely to surprise to the upside…depending on our man in the White House, of course.
3) If you want to read a great bit of Aussie history, pick up a copy of Charles Todd’s Magnificent Obsession.
It’s how the telegraph line was built between Adelaide and Darwin in the 19th century. The project began before the route was mapped or even explored.
It required many heroic acts, incredible fortitude and intelligence along the way from the many involved.
They built men and women tough in those days.
Once complete, the line enabled Australian colonies to communicate with the rest of the world in a way that was astonishing at the time. It’s also how Alice Springs got its name.
It’s a fascinating story of the pioneering spirit that built modern Australia.
Best wishes,
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Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
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