In the iron ore sector some changes have taken place. (1)port stocks of iron ore in China rose for the first time in roughly 3 months (signaling prices are headed lower), (2.) iron ore produced domestically in China rose for the first time sinceSeptember 2014 (3.) Atlas Iron is nearing full production after shuttering capacity 2 months ago, (4.) Rio Tinto is in the midst of its next large 20-25mmtpa 2015 supply ramp (evidenced by the surge in Port Headland shipments recently), and (5.) new capacity is coming from Roy Hill (55mmtpa), BHP Billiton (BHP) (25mmtpa), and Sino and Anglo American (AAUKY) (40mmtpa). Furthermore, and rather shocking given the excesses that look apparent in the iron ore market, we learned that, for the first time ever, Fortescue Metals Group is offering iron ore on a spot basis, or, for all intents and purposes, “dumping” iron ore into China. Net, net we believe these factors, as well as others touched on in this report, are setting iron ore up for a pending collapse significantly below the $47/mt low set earlier this year.
While all of these data points suggest, strongly, that iron ore prices are right ahead of a major correction lower… we surmise that forthcoming protectionist measures will limit the outlets with which excessive steel production in China can find a home. Thus, as we have stressed in numerous reports this year, given virtually no iron ore capacity was taken offline when prices breached the $47/mt level in early April, we believe prices must go below this level, and stay there, for any rationalization in capacity to occur. Under this scenario…we see considerable downside to both Consensus estimates and share prices for all of the iron ore stocks we cover (Outperform-rated Rio Tinto; Underperform-rated Cliffs Natural Resources; and Underperform-rated Fortescue Metals Group).
Source: blogs.barrons.com/
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