China/iron ore

We don’t have much iron ore in the portfolio.

We thought, for years, but particularly back in 2019, that China’s property sector was in danger of imploding, and that would weigh on the demand for steel and thus on the need for large quantities of Australian iron ore and coking coal.

And, we got that macro call right. Housing starts collapsed, down some 60%. Yet iron ore is up 30% over the last year, and BHP/RIO are in rude health.

Now, housing under construction remains pretty close to record highs. Some, in the market, posit that under construction will follow housing starts and hence “the fall in demand for steel is just around the corner”.

That graph I tend to see “doing the rounds” is effectively the same graph as the one above, but it uses a dual-axis graph (housing starts on the left, under construction on the right) to make the point. It sure looks compelling!

We tend not to use dual-axis charts, in which case you’ll want to z-score the data. It still looks pretty striking.

Anyway, circling back to the premise of the note.

We “predicted” (as did many others) China’s housing bubble and subsequent property implosion.

But we thought iron ore would sell off, by a lot. And it has not.

As such, most of our underperformance in our direct equity sleeves stems from not having enough BHP, and any RIO/FMG/MIN, and the tail of smaller iron ore players.

And so I am reminded of that old saying “do you want to be right, or do you want to make money?”.

It is very difficult to buy something in size, when your process tells you not to. And those demographic headwinds (shown below, in the future, China’s population out to 2050 will have some 300 million fewer people) just add to those cyclical pressures of overvalued property markets collapsing.

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