Why calls on the top and bottom of iron ore market are right – by Matthew Stevens (Australian Financial Review – October 17, 2016)


Last week Andrew Forrest suggested that the worst was likely over in iron ore markets. On the same day, Citi Research called the top of the iron ore price cycle while reaffirming predictions that iron ore would trade at around $US45 a tonne through next year. As it turns out, probably both the billionaire chairman of Fortescue Metals Group and the investment banks are likely right.

Forrest was plainly referring to the four years of brutal price reversion that were always going to follow the secular change forced on the basic materials and energy markets by China’s emergence as the shaping force of seaborne bulk commodities markets.

Fortescue was one of several miners pressed to breaking point during the trial by mean reversion and its stunningly successful race down the iron ore production cost curve stands as a company-saving testament to the Third Force’s management.

But Citi’s brave move to call the top of this year’s sustained and sustaining recovery in iron ore prices was just as affirming of the fact the potential mean reversion is over and that markets for Australia’s critical commodities, iron ore and coal, have stabilised to the point that we can now identify callable tops and bottoms to medium-term pricing cycles.

If Citi is right then it would be fair to assess that it has prescribed the bandwidth of iron ore and coal for the medium term. And that is a very useful thing for investors and governments as it offers a much more nuanced view of income outlook for individual companies and the national exchequer.

For the rest of this article, click here: http://www.afr.com/business/mining/iron-ore/why-calls-on-the-top-and-bottom-of-iron-ore-market-are-right-20161017-gs42e5