Why iron ore spiked, and why it probably won’t last

Published at Mar 8, 2016, in Features

You may have seen around the place that the price of iron ore jumped by upwards of 19% yesterday, but this seems to be squarely in the ‘spike’ category rather than a catalyst moment.

In case you missed it, the price of iron ore went from $US52.40 ($A70.13) to $62.20 per tonne, with the 19% spike on of the largest single day gain for at least five years.

So, what prompted it all?

The Chinese government is now targeting growth of 6.5% to 7%, quite healthy growth figures which suggest the central government is going to attempt to keep the foot on the accelerator rather than cool the overheated market.

It also seems that comments from Chinese Premier Li Keqiang, the second most powerful man in China, prompted the spike by saying that the country would spend 800 billion yuan ($A164.3 billion) or railway construction and 1.65 trillion yuan on building roads.

Both of those things require steel, which in turn requires iron ore.

The announcement was likely in response to a flagging manufacturing sector in China, which has suffered with overcapacity issues.

In short, there’s not enough work for them to do, which is rare.

One Australian company, NSL Consolidated (ASX:NSL) has sought to take advantage of this situation by effectively re-negotiating contracts on key fabrication orders.

Iron ore which has been shipped from China has merely been stockpiled, laying in wait until there’s actually enough construction drivers for manufacturers to use all that steel.

The picture wasn’t great for iron ore exporters going into 2016, either.

According to Shanghai Steelhome Information Technology Co., which tracks commodities in Chinese ports, there was 93.1 million tonnes of iron ore laying in wait at Chinese ports in the final reading of 2015.

So, the demand driver will clear all that capacity from the ports as manufacturers start building rail and roads, right?

Several commentators and analysts have told investors to cool their jets on the news.

Bloomberg quoted chief investment officer of wealth management at Northern Trust Corp Katherine Nixon as saying that the spike was more a function of trading than market fundamentals.

“These kinds of rallies tend to be rare and short-lived,” Nixon said in an interview with Bloomberg Television on Monday. “You had deeply oversold markets that had significant short positions that people are rushing back into cover.”

Meanwhile, The Wall Street Journal quoted analyst from Societe Generale Robin Bhar, backing up Nixon’s position that it was more about the market than the actual buying of steel or iron ore.

“We don’t have enough evidence to suggest a turnaround. We’re not seeing a huge upswing in [physical] buying,” he was quoted as saying. “This is a short-covering bounce.”

The message here was that traders had positions against Chinese growth, but when the Chinese Premier made his remarks it prompted a lot of panic selling of positions.

The spike was related to trading more than evidence that steel production is picking back up, and if the government’s ambitious plans do come off they will take a number of months to work through.

That’s why the spike is unlikely to last in the shorter term, but if the Chinese government is able to work through the plans then there could be an easing of the oversupply which currently characterises the iron ore market.

In fact, investors should perhaps be a touch worried by the aggressive targets set out by the Chinese government.

There’s a school of thought that the growth in China in recent years was really build on a house of cards – fuelled by currency manipulation and less than reputable data.

It was also partially built on spiralling debt from China’s private companies which were given a mandate to build, build, build.

In fact, private Chinese debt is thought to be more than 200% of GDP – which is hardly a good news story.

The credit was mainly obtained to keep up the pace of modernisation in China, which involved the building of new buildings, roads, rail – and for a while there was good return on investment.

As you reach a point where there is less need for those things, the return, particularly on real estate, becomes less.

So will simply trying to stimulate the economy through another round of infrastructure necessarily work to get China’s GDP to that 6.5% to 7% mark? You may very well see short term spikes at play, but it hardly seems sustainable.

Where to invest $1,000 right now

When the experts at Next Investors have a stock pick, it may pay to listen.

The Next Investors have been investing in ASX small cap stocks for years, with their best small cap picks yielding returns of 1,200%, 1,120%, 900% and 678%.

They have just revealed their hand-picked, FY2021 stock portfolio of high conviction long-term investments.

Click the link below to see what they are currently investing in.


S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Australian ASX Small Cap stocks | Why Finfeed.com is Australia’s leading small cap publication

Founded seven years ago, Finfeed.com is Australia’s leading and longest standing website for investor and finance news, education and expert opinion.

Published by StocksDigital, Finfeed was created to report daily on the comings and goings of ASX listed stocks in the small cap market.

As the first digital publication dedicated specifically to this space, Finfeed soon became the most trusted publication in the market, quickly garnering over two million page views – a number that continues to rise.

Finfeed.com provides its readers with informative articles that tackle the latest in market moving #ASX small cap news, plus exclusive content you won’t find anywhere else. It is aimed at those with an interest in investing, market education, company performance, start-ups and much more.

Finfeed.com is the only media organisation operating under the strength of a Financial Services License and is backed by leading journalists and analysts all with brands of their own.

The website aims to inform, educate and entertain with content that drills down into the heart of financial matters.

Finfeed is a leading source of investor and market information, with everything investors need to know about how to invest written in a way that anyone can understand. 

Over the years, the website has expanded beyond exclusively reporting on small caps, to profile Australia’s leading ASX listed small, mid and large caps as well as some of the country’s most successful CEOs and business leaders to find out what makes them tick.

Every day you will find fresh content covering:

Fast Facts

Over 4,000 articles published

Over 2.3 Million Page Views and counting

Over 10,000 followers on social media

Subscriber list growing by 2% monthly

Thanks for subscribing!