Thursday, September 27, 2007

Shortages Here, Shortages There - Iron Ore is the Shortage of the Day

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I am losing track of all the commodities we are having shortages of. If it's not titanium, its copper, if its not copper its wheat, if it its not wheat its potash, if its not potash its (drumroll for shortage of the day) iron ore!
  • Shortage of supply coupled with high demand and continuing growth in Far Eastern steel production could see a big increase in iron ore contract prices next year.
  • With predictions of price increases for iron ore next year ranging from 25 percent to 100 percent, an investment in this sector may prove to be one of the best bets of all if one assumes Chinese and Indian growth continues at the current rate.
  • It also suggests that the world's biggest diversified miners, BHP Billiton, Rio Tinto and CVRD - all of which generate huge returns from their iron ore businesses are set for further big earnings increases in the year ahead consolidating their respective positions as world mining leaders.
  • Much of the speculation over the likelihood of high iron ore prices has come from reported analysis by Merrill Lynch and JP Morgan, both of which reckon that next year's contract prices for the big producers with the Chinese steel mills will be negotiated at around a 25 to 30 percent increase and Merrill feels even a 50 percent increase or more in contract prices is not out of the question.
  • Supply is seen as not meeting demand up until the end of the decade at least, and it could be the marginal supplier who will benefit most as the steel mills bid up the price to meet demand.
  • According to a Bloomberg report today benchmark prices may rise 30 percent to a record $66.40 a tonne next year, from $51.47 in 2007, according to the median forecast from eight analysts.
  • Should industrial growth in the Far East continue at or near the current rate, the supply/demand imbalance is likely to continue until the end of the decade leading to even higher achieved iron ore prices for the next three years.
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I won't go on a "of course there is no inflation" rant ;) Ben pushed that worry off to ... to.... well, 'the future'. But my gosh it looks like a tidal wave of world wide inflation from these commodities.

Have you seen the charts of BHP Billiton (BHP), Rio Tinto (RTP), and CVRD (RIO) the past week? My gosh you'd think these were Chinese small cap stocks. I thought with their massive market caps of $100-$225 BILLION they could not move like this. Boy I was wrong.

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CVRD (RIO), #2 Miner in the world has gained $25 BILLION in market cap in the past 5 sessions. There are only about 200 companies worth that much in total - wow. Thank You Ben for making this all possible.
  • Companhia Vale do Rio Doce (NYSE: RIO, $48.32 a share), the world's No 2 mining company, after BHP Billiton (BLT.L, £13.78), has gained more than $10 a share in the past five or so trading sessions, adding around $25bn to its market capitalisation. The gain alone is close to the entire value of Barrick (ABX, $32.13), by far the world's most valuable gold digger.
  • CVRD's performance has been based mainly on the group's ranking as the world's No 1 producer of iron ore, with 33% of the seaborn market.
  • Iron ore is used almost exclusively in steel making, and remains in heavy demand in China, which overhauled Japan as the world's largest buyer of iron ore in 2003. China is far from alone among developing economies in notching up significant annual rates of increase in its use of steel and related products.
  • CVRD's recent stellar stock price performance follows a series of upbeat forecasts for iron ore contract prices into the medium- and long-term. Last month UBS said it had increased its iron ore price forecasts to 25% in 2008, from 10% previously; Goldman Sachs JBWere last week increased to 30% from 9% previously; Credit Suisse Group is looking for a 25% gain, and RBC Capital Markets this week raised to 35% from 10%.
  • The global iron ore sector is dominated by CVRD, BHP Billiton and Rio Tinto
  • CVRD's recent stock price performance has been in spite of its substantial nickel division, where spot prices have been mauled in the past few months. CVRD, however, also maintains substantial operations in copper, and integrated aluminum (bauxite, alumina and primary aluminum), and also produces kaolin, and potash. [Did someone say potash?]
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Well guess it was a mistake to not be looking at this sector simply because the stocks had such high market caps. I do have one other pure play iron ore stock I have traded in the past, and I will have to revisit that name and do some digging this weekend, errr I mean I will have my analyst team do some digging this weekend and report back to me. Last I looked it was more of a domestic play so I have to recheck it's international exposure but its chart is also ramping massively.

There's no party like a Ben Bernanke party - woo hoo.

No positions but I anticipate buying some of these names on the next (if ever?) pullback.

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