Iron ore prices have continued their free-fall, likely to print below US$150/ton when the market updates tomorrow.
The prices of our majors were belted today: BHP – 6.35%, RIO -6.52%, FMG -6.15%. An expensive day for me as I enter one week in solitary confinement (lockdown).
“If something cannot continue, it won’t”. Iron ore has now lost a third of its price in a month. Mathematically, it cannot continue to fall at this rate, ergo it won’t. That may sound facetious, but it’s important to keep in mind. I remember I said the same to myself when the ASX fell from 7,000 to 5,000 quick-smart at the start of the crisis in 2020. I thought to myself, if it falls that amount again we will be below post-GFC lows – when the end of the world seemed upon us. Sure enough, the market bottomed shortly after and is now back over 7,000.
Yes, there are some valid concerns with iron ore. China is quite explicit that it wants to reign in excess production in the sector. Scrap is expected to play a more important role over time. Vale has had strong exports in recent months and new production is possible in Africa.
Yet, let’s think of the positives:
- China has a history of backtracking on reigning in steel production
- Massive money printing will raise the nominal price of commodities
- Input costs are starting to creep up, meaning the marginal cost of producers is also. That cuts the scope for opportunistic investment by new entrants.
All-in-all, the severity of the crash has surprised me a little. However, I’m not currently panicking or thinking of selling my positions. I’ll reinvest the dividends into stock at now discounted prices and watch how the market plays out.
Interestingly, lumber, another massive commodity price gainer has puled back massively too. That lends some credence to the ‘commodity bubble’ narrative. For some reason, I don’t see us entering into a bona fide deflation this year. Imagine the fat to be cut in the real estate market?