Iron Ore Miners Surge But Is the Rally Overdone? – by Robert Guy (Barons – April 20, 2016)

From a top short to top dog, Fortescue Metals Group (ticker: FMG.AU ) is defying the commodity market doomsayers with a powerful rally that has made it the top performing Australian stock so far this year.

The 90% rally in shares of the iron ore miner testifies to a surge in the price of the key steel making ingredient as signs of stabilization in China’s economy, aggressive cost cutting and lower production forecasts from industry heavyweights BHP Billiton ( BHP.AU ) ( BHP ) and Rio Tinto ( RIO.AU ) ( RIO ) have forced investors to cover short positions in the commodity and iron ore stocks.

BHP Billiton said on Wednesday it would produce 10 million tonnes less in 2016 than previously forecast, while Rio Tinto earlier in the week said its target of shipping 350 million tonnes a year by 2017 would be delayed. Both stocks are up roughly 14% this year compared to a 2% fall in the benchmark S&P/ASX200 Index.

The drip feed of better economic news from China has also helped the big iron ore miners. China claimed its economy grew at a 6.7% pace in the first quarter, while recent gauges of manufacturing activity suggest activity in the workshop of the world may be stabilizing.

A significant spike in lending in March strongly hints that Beijing has moved to support growth, even at the risk of exacerbating the problems of the nation’s growing debt burden. Meanwhile, China’s property market is running hot thanks to supportive policies. “You can only imagine how difficult it is to try and develop the economic growth pattern for a country like China so that it’s consistent.

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