Getting ugly in the mines

Equity trading is getting ugly again; the US has been absent-mindedly meandering higher over the past month.

Source: Bloomberg

Yet that lead has not transferred to Asian markets (disregarding the spending machine that is Japan). Over the past weeks, I’ve been asking myself, are we seeing the beginning of the end for the iron ore boom?

In fact, it’s something I’ve actually been asking myself for many years. Each time I did, China would stimulate its economy and continue to power on with its rapid urban expansion projects and the mass infrastructure required to bring this vison to fruition. As President Xi Jinping stated earlier this week: “China will continue to grow at rates required to lift people out of poverty and to produce a prosperous nation.”

That, to me, only half-answers the question. Demand for iron ore from China will have decades to go. However, infrastructure supply, such as housing, roads and ports is now tipping into oversupply as demand starts to reduce. The cooling housing market in China is one of the most worrisome pieces of data to come out of China in years. 72% of domestic Chinese investment is in property. Equities make up only 17% of that total investment pie.

Property is the clearest indicator of Chinese sentiment and the ‘wealth effect’ (something Australia should understand all too well according to a recent report from Moody’s). The central government will have its finger on the pulse here. Although it continues to talk about fiscal consolidation and tighter fiscal structures to ward off the forecasted hard handing of the future, it will flick the stimulus switch if the slowdown turns into screeching halt.

One of the most likely moves is central government relaxing the recently introduced housing laws. However, this would again promote increased risk-taking and increases the likelihood of rising bad and doubtful debts which are also on the rise, as seen in Monday’s data.

With property price cooling, new housing is going to find it hard to continue at the pace it was once at – which is why iron ore, copper and the like are forecasted to see further downside in 2015. So, is this the end on iron ore? No, there will always be a need for it and prices will find equilibrium in the coming year or so.  What is becoming increasingly obvious, however, is that the iron ore boom is now at its end. 

Ahead of the Australian Open

The falls in the Australian market look set to continue today. We are calling the ASX 200 down a further 10 points to 5359 and that puts the market staring down zero gains for the year once more (5352 is where it began in 2014).With iron ore holding onto the $70 handle by its fingernails - the spot price closing yesterday at US$70 a tonne - the dramatic falls in the material space is unlikely to slow down today.

We continue to watch FMG closely, as according to the most recent estimates from Goldman Sachs, FMG’s all in cash costs are $71.80 a tonne. This means on current spot prices, FMG is losing $1.80 for every tonne it pulls out of the ground and that’s assuming the concentrate is 62%. It has seen concentrates falling to 58%, which attracts a 15% to 20% discount. If FMG can’t hold onto its current price level, then the technicals are suggesting $2.00 a share is where it’s heading and the drag this will have on the rest of the mid-cap miners will be dire. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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