“So far, so good. And still a long way to go. You haven’t seen capitulation in these names yet.“”
That was our comment, regarding our August 5th tweet about iron ore prices. So far, so good.
What’s been guiding us is simply stated policy. China has made very clear their intent to curb emissions, to reduce steel production, and tame commodity prices.
Numerous changes to margin requirements, ominous throat-clearing about profiteering and speculation in commodity prices are just a subset of that story.
The not-so-stated policy concerns Australian politics, which is looking toxic, by way of relations with China, and trade centric concerns (which have been felt in wheat, wine, coal, seafood, and many others, both globally and domestically) have added to our shopping list of worries, as iron ore marched higher.
General macro has also guided our thoughts, chiefly the China slowdown. Fixed asset investment (FAI) credit growth, monetary policy (money supply), imports (as a proxy for domestic demand) and real estate specific concerns over the solvency of Evergrande (who is insolvent) has also remained a good guide.
We didn’t chase iron ore on the way up (we owned BHP, and SGM (Sims Group, steel production), and sold out of SGM arguably too early at $14) and are not chasing it on the way back down.
In this note we haven’t gone into iron ore itself on a deeper basis (we’ve done so in prior notes, looking at Vale, steel margins, domestic demand, Australian production, inventory balances), rather, we’ll make the point that incentive prices for new production remain much, much lower than even current prices (~$110/tn), which acts as the final guide to our underweight decision.
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