- We left yesterday’s Money Morning with the idea that iron ore would be stronger, for longer, than most think.
There could be good opportunities to benefit from this!
Part of the rationale for this is the talk coming out of Rio Tinto. See yesterday’s article for that.
Now we can add further to our idea here thanks to BHP.
The Australian Financial Review cites their chief commercial officer, Vandita Pant.
Pant says that Chinese steel production is running at a record rate. And that’s with their property market still in the doldrums.
Portside iron ore inventory is at a 4-year low, and demand is coming in big from electric vehicles, manufacturing and infrastructure.
The market looks tight!
Pant says this current momentum behind iron ore could run into 2024.
The market, at least to me, has not priced this potential in, certainly at the junior end of the market. I smell opportunity.
Here’s the part of the AFR report I found most compelling…
‘UBS and Citi analysts expect iron ore prices will need to be higher for longer because the miners will need to spend upwards of 30 per cent, according to UBS, on new mines to maintain current export rates, let alone grow export volumes.’
This could be important. If we get a demand lift, BHP, Rio and FMG can’t increase exports materially.
They have been firing on all cylinders for a long time now.
Here’s the rub…
The smaller iron ore producers can’t get iron ore to market as cheaply as the big three can.
Most of the mid to junior miners need at least US$80-$US90 per tonne to be profitable.
This would suggest that iron ore is unlikely to fall below US$100 if demand stays robust.
That gives the market a solid base. Now we just need to see if the price can run up and break US$120.
Such an outcome can pour a river of money through the Australian share market.
As yet iron ore is still oscillating between that $105-$120 range. Perhaps a break above US$120 never comes.
However, prepare yourself now, just in case it does. Iron ore miners, especially the juniors, could surge, like they did in 2021.
My latest report has an iron ore junior in the top five recommendations for this very reason. It’s looking good so far.
- I don’t pretend to know a thing about the current situation in Israel.
What I can tell you is that, right now, the markets don’t seem concerned that it’s going to break out into a wider flare up.
At least that’s what the price action suggests. Both the Aussie and US stock markets are rising.
The VIX and MOVE indices, which measure volatility in the stock and bond markets, are not spiking.
Oil is back under $90 a barrel.
This implies market strength to me too.
My friend Phil Verleger is one of the world’s premier oil analysts.
He says that speculation played a big part in the run up towards US$100 oil recently.
Those bets are now rolling off as traders and hedge funds take their profit.
Phil said this before the situation in Israel broke out.
As yet there’s no indication that supply is affected. And US oil production is booming too.
Perhaps most vitally, according to Phil, is that gasoline margins in the US are currently negative.
That will likely limit refiners bidding strongly on oil because the only thing propping up their profits is the diesel market.
Oil, as of now, should fall away from threatening US$100, perhaps finding support around US$80 a barrel.
The outlook for oil is important.
The Producer Price Index for September was released this week. It came in higher than expected, in part because of oil.
However, the fact that stocks are rising in the face of this suggests the market is looking beyond this blip to lower oil in the fourth quarter — absent any wildcard from the Middle East.
This is supportive of the stock markets around the world.
Editor, Money Morning