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The price of a tonne of iron has raced ahead from lows of $86.50 in September to reach $145.50 in Asian trade this week. Why has this happened? Will it last? And how to play it?
Let’s start with the easy one? Why? China. PMI data for November just before Christmas encouraged folks into believing that the Chinese economy is recovering. I read it rather differently. There was no increase in exports. No spike in domestic consumption. It is merely that the Government is “investing” (i.e. pissing away borrowed cash) on a new mammoth $80 billion infrastructure programme building projects no-one really wants or needs. Meanwhile ahead of the Chinese New Year there is an element of restocking underway. That will unwind after February.
The fundamental problem with China remains. Since 2008 its banks have under Government diktat extended new loans of 14 trillion dollars (more than the entire US banking system). Many of these loans are in the strictest sense already non-performing. Since exports are not increasing, companies operating in markets that already suffer global over-capacity and are bust now will still be bust in six months. It is merely that the banks are being ordered to extend them more credit. I am sure that you can see a flaw in these cunning plans but pro tem sentiment has changed and the restocking has seen demand for iron ore increase.
I note that analysts have a consensus forecast for the average 2013 iron price of $120 a tonne. Thus they do not think the upwards trend will continue and frankly neither do I. For what it is worth, Rio Tinto has also warned that it will not last. As such I would be reluctant to fill my boots with iron stocks.
Having said that, when the price hit $90 a tonne the valuations across the sector took a battering. They have recovered sharply since early December but most sector plays are still well off 2012 highs (let alone levels seen in 2011). So there may be selective value. I repeat that this is not an area I feel very keen on but there is an argument for having some exposure – at least temporarily. If you are looking for a couple of ideas:
AIM listed Bellzone Mining (LSE:BZM) at a 16p share price looks pretty attractive even at $100 iron. Go here for my full analysis of Bellzone.
Rather more speculative is fully listed Anglesey Mining (LSE:AYM) which I called as a speculative buy at 7p in late November. It is now 14.75p. Well done me. Click here to read my analysis of the Anglesey case.
And if Iron has motored ahead why not Copper next? It could well happen, in which case click here to read my best idea on how to play copper – a stock that is very cheap even at current copper prices, let alone much higher ones.
Tom Winnifrith writes for 10 leading UK and US financial business and political websites. You can get alerts on all of Tom’s articles and thoughts by following him on twitter @tomwinnifrith
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