2023 just keeps delivering surprise after surprise. The situation in Palestine is the next in a long line.
Unfortunately, there haven’t been too many positive ones for us investors.
Here’s a small glimmer.
Did you know the price of iron ore is up 20% since May?
That’s a strong signal that the Chinese steel sector is more robust than most presume.
While the Chinese property sector is weak, manufactured goods and infrastructure demand are up.
Is that all?
Actually, no. Here’s the meaty stuff to give us some hope for the future.
Part of the apparent strength in the price of iron ore is that, while Chinese domestic demand is soft, they have been exporting more steel.
The WSJ reports that exports are up 28% on last year in the eight months to August.
What gives?
Urbanisation in India, the Middle East and south-east Asia is driving commodity demand.
Great!
Let’s dig in a bit more…
Rio Tinto came out with their latest analysis around this on Monday.
What did they tell us?
Management there say as many people will urbanise in the next 10 years that have done so in the last decade.
That’s big!
India is the big demand driver from here and should drive the overall steel market to keep expanding even as China flatlines.
Indian stocks confirm this idea…they’re booming!
Here’s the other thing we can note about iron ore…
Rio Tinto said it’s now shipping out more lower grade iron ore than previously expected.
This hurts their margin because this blend earns less in the market.
It also goes against the structural shift underway in the global steel business.
That’s the demand for higher grade iron ore to reduce carbon emissions.
Higher grade iron ore always commands a premium.
However, this could get even bigger in the future as Net Zero policies became more urgent.
Why do you care?
The big three producers BHP, Rio and FMG dominate the iron ore market, as you know.
However, there is also a bunch of small-cap iron ore producers that benefit from the elevated price and consistent demand. Some of them have a high-grade product too!
Think about this more broadly…
For years (and years!) one consistent fear in the Aussie market is that iron ore is on its way to US$60 a tonne as Chinese demand eventually goes kaput.
There is only so many bridges and apartments even a country as big as China needs.
Or so the thinking has gone for a long time.
And yet, iron ore still trades above US$100 a tonne. We’re still waiting for that big drawdown.
Here’s the other thing…
Capital expenditure on new mines has fallen away over the last 10 years because the big companies paid down debt and paid out profits as dividends.
Another observation from Rio sticks out now.
It’s taking them longer to get new mines permitted.
Now think about that…
For a decade the world has expected the high price of iron ore to go the way of the dodo because the demand would not be there.
Rio, and the price of iron ore, are telling us that the demand IS there.
Now think about all those Indians and Vietnamese and Middle Easterners urbanising…
At some point it’s possible supply and demand don’t meet the current equilibrium and the prices go higher, not lower.
We already saw this in 2021 when iron ore went over $200 a tonne.
Nobody except me seems to think this can happen again.
But look around the commodity markets.
If there’s a current theme, it’s that the slightest disruption to supply can send prices soaring.
Over the last two years, we’ve seen price spikes in oil, coal, rare earths, lithium and iron ore. Now we are seeing uranium rumble.
The general outline is that demand stays constant, or keeps growing, while investment in future supply has been anaemic for a long time.
This is shaping up for an extended bull market in commodities.
Let’s bring it back to stocks…
What I like about the iron ore juniors is that they are profitable (if they are producing already).
However, there is zero expectations of an ongoing bull market built into their share prices.
Compare that situation to the junior developers in other commodities with more sexy narrative appeal.
Many of them need to build their mines first.
They require huge financing and their projects are built on dicey cost estimates when inflation in materials and labour — if you can get them — are rising.
That’s a hard road to plough as an investor.
But iron ore producers are making great cash right now.
I like that.
And ongoing urbanisation around the world is good news for Australia in general.
That’s something to smile about, in a grim week indeed.
Best wishes,
 |
Callum Newman,
Editor, Money Morning
