I think it’s essential to look at specific commodities as part of our broad coverage of the resource market.
Not just once but continuously revisiting them as themes evolve. So far this year we’ve focussed on copper, uranium and gold.
But as you might recall, we also dug into the iron ore market in March.
Part of the reason was the flurry of deals happening at the time, which were going virtually unnoticed by the market.
In late January, billionaire Andrew Forrest launched an off-market bid to acquire Red Hawk [ASX: RHK].
This junior owns the Blacksmith iron ore deposit just 30 kilometres west of Fortescue’s Solomon operations in the Pilbara.
That was followed by Rio Tinto’s [ASX: RIO] $1.8 billion announcement that it would develop the Brockman Syncline project in the West Pilbara.
Around the same time, Vale also announced a massive $12 billion expansion for its Carajas iron ore project in northern Brazil.
While those announcements flowed through, a long-fought-out bidding war was taking place between Fenix Resources [ASX: FEX] and Rio Tinto.
That was to acquire the iron ore junior CZR Resources [ASX: CZR].
A bid that Rio eventually won.
So, while many analysts point to the worsening supply/demand outlook in the iron ore market, M&A and development action has been soaring in 2025!
So, is there an opportunity?
Iron ore was among the least appealing investment opportunities last year.
And that outlook has gone from bad to worse after the US tariff war against China escalated last month.
Given its heavy leverage to global growth, this metal, a ‘one-trick pony’ in the commodity world, is especially susceptible to a trade war that might weaken Chinese growth, the primary driver of iron ore demand.
And tariffs follow a long list of bad news items for iron ore stocks…
Ongoing deflation in China. The country’s weak real estate market AND significant production cuts by the country’s largest steel makers.
But that’s just the demand side.
Rio Tinto remains on track to deliver vast quantities of NEW supply in 2025 from its giant Simandou iron ore operation in West Africa.
While the demand outlook seemingly collapses, Rio is preparing to drown the market in more supply!
So, is there any reason to be optimistic?
Iron Ore: Stimulus still the main game
Any resource investor would know that iron ore stocks are pegged to China’s economic outlook. Nothing much has changed over the last 15 years.
Except for one thing…
A key point of difference that could make 2025 a perfect year for this beaten-down market is that China has already laid out its stimulus playbook. That’s rare.
Last December, officials announced ‘they would deliver whatever stimulus was needed to counter the impact of Trump’s trade tariffs.’
In other words, if Trump tariffs impact the Chinese economy, the government will guarantee a helping hand to prop up business and consumer confidence.
This could become a case of ‘bad news’ (in the form of tariffs) that could spark a rally in iron ore stocks at some point in 2025.
So, if you have the stomach for added volatility, this might be one sector worth a glance—a counter-cyclical bet on a surprise rally among iron ore stocks.
But how far will China take stimulus in 2025?
That’s the big ‘unknown’ here.
Iron ore stocks will remain rangebound if stimulus fails to target housing development or other infrastructure projects.
But that’s part of the risk/reward.
Iron ore stocks are already trading at the lower end of their multi-year trend pattern, as you can see with FMG, below:
| |
|
|
This offers a clear ‘line in the sand’ to work with.
A simple way to manage this risk is to place a stop loss below the lower trend line, shown above.
As long as FMG trades above this level, investors will remain ‘in the game’ for a potential bullish announcement from China.
Who knows if that rebound will ever come, but at worst, you’re only risking 10-15% of your capital by having a clear exit pathway.
A strategy like this offers a simple risk/reward.
In the meantime, you can bank a healthy 8.5% dividend yield by simply waiting for this to play out.
It’s one example of how an unacceptably risky market can be flipped into an opportunity with a healthy reward-to-risk outlook.
But only IF you stick with your plan.
While this strategy might resemble ‘trading’, a word that often deters long-term investors, it’s rooted in risk management.
As long as FMG remains above your defined exit point, it can stay in your long-term portfolio and collect that healthy dividend.
For more resource investment ideas like this, be sure to check out my advisory service here.
Have a great weekend.
Regards,
 |
James Cooper,
Editor, Mining: Phase One and Diggers and Drillers
Comments