Let the Iron Ore Wars Begin! – by Dan Denning (The Daily Reckoning Australia – January 10, 2013)


The iron ore price is quickly becoming a focal point in the dispute between resource bulls and bears. It’s kind of like a Rorschach blot test for investors. What you see in the price may tell you more about yourself than it tells you about iron ore.

But the objective facts are the same no matter who perceives them. At $150.90 per tonne, the spot iron ore price is at a 15-month high. It’s up 70% from the August lows last year. Those are the facts.

Another fact is that Fortescue Metals Group (ASX:FMG) is up almost 60% since closing at $2.97 on September 6th. It even closed at $5.04 on January 3rd. Andrew Forrest’s little darling requires high iron ore prices to be viable. The recovery in the spot market came just in time.

Deutsche Bank analysts aren’t convinced, though. They slapped a ‘sell’ recommendation on the shares earlier this week. Analysts hardly ever tell investors to sell anything, so this must be serious. And sure enough the DB boys say the current share price is factoring in a spot price of $150/tonne until 2015, which is a long time from now.

A lot can happen in a couple of years. But the real debate here is over the long-term, big-picture outlook for China and commodities. If China’s steel boom is over, Australia’s iron ore boom is over. The spot price will settle at a lower long-term level. Mid-tier and junior iron ore producers will struggle. Their shares will struggle more.

Credit Suisse analysts reckon the recent rally was more like a swan song for resources. They wrote that it was ‘one last hurrah’ for the iron ore price. They expect $90/tonne in 2015. So there’s a question for you: who stays in business at $90/tonne and who doesn’t?

Yesterday we chatted for about an hour with Diggers and Drillers editor Alex Cowie. We can’t reveal everything that was said. But if our suspicious are correct, the good doctor is about to hit back at all the resource doubters and China bears. He says he’s prepared to back his judgement with several new share tips in his January letter.

Greg Canavan was not around to dispute him or challenge him to muskets at dawn. Our co-editor here at The Daily Reckoning is enjoying some much-needed time with his wife and newborn daughter. But Greg has already gone on record with his forecast about China, and what it means to Australia. You can read his ‘Fuse’ report for all the explosive details.

But speaking of iron ore demand and China, one thing that would surely support more iron ore demand is a shooting war between Japan and China. Murray wrote yesterday about the currency policies of the new Japanese Prime Minister, Shinzo Abe. But let’s not forget what you can do with all that new money: buy guns.

For the rest of this article please go to The Daily Reckoning Australia website: http://www.dailyreckoning.com.au/let-the-iron-ore-wars-begin/2013/01/10/