Mixed signals for iron ore plays

Year-to-date, material plays have contracted 3.14%, which is the worst performing sector on the market.

Iron ore plays have fared even worse as China pessimism drags on the sector and future expectations for steel. Front running in the iron ore plays on speculation China data will be poor has hit fever pitch in the past week with FMG off 12.3%, RIO off 7.1% and BHP off 4.4% and show no signs of abating.

These falls all co-inside with the release of China’s CPI data, trade balance and the big drop GDP on Tuesday. Industrial metals the world over have been on the side as tapering increases in the US and China slows.

Copper has fallen steeply on these concerns, as speculation about future demand plummeting leading to prices in copper futures contracts coming well off the monthly highs.

The China fears are causing macro issues to overlook the micro positives in these plays.

Port Hedland release staller export numbers this week, showing iron ore shipments hit record highs to both china and the rest of the world.

BHP, RIO and FMG have all released production data over the past seven months, with record highs from each and, more importantly, the iron ore price in AUD terms has held firm in the second half of 2013.

In AUD terms, iron ore has fallen 3.1% compared to 15% in USD terms.

The expectations that have been built in to most forecasts for FY14 has iron ore at US$110 to US$120 a metric tonne, the average price so far in FY14 is US$135 a metric tonne. CAPEX is shrinking and all three are streamlining divisions to offset the slowness in resources globally.

I believe that after the China data, BHP, RIO and FMG will enter a holding pattern before rallying into the first half results due in February. The current weakness does look over done and could be a prime buying opportunity.

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