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Iron Ore: Key Themes To Consider



  • Iron ore has been one of the better-performing commodities in 2020, supported by demand from Chinese steel mills and supply-side disruptions in Brazil.
  • Australian miners have benefitted significantly but Australian-Chinese relations are dicey and this could alter supply-side issues going forward.
  • Chinese demand for iron ore may slow over the next couple of months due to the onset of the summer season but could return post-August.
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This extraordinary metal, the soul of every manufacture, and the mainspring perhaps of civilized society. Of iron. - Samuel Smiles

2020 will mean different things to different people, but I think we can all acknowledge the one common theme we've all been afflicted with this year has been uncertainty. Whilst this theme of uncertainty will likely continue for the foreseeable future, ironically, one thing I'm almost certain of is that I won't be getting any Christmas cards from Papa Powell and the League of Extraordinary Bankers. If you've been keeping abreast of my views across the internet and other media platforms, you'll know I've been quite critical of the actions of central bank policy in socializing losses and using bountiful stimulus to abet sub-substandard businesses. Admittedly, the US Fed isn't alone in churning out this largesse, with key central banks, the world over resorting to similar measures. I've postulated before on what all this could mean for the world going forward, and one argument I've repeatedly brought up is the reflation angle.

Supply chain bottlenecks continue to linger, and I think one area where you could see all this excess monetary stimulus being diverted to is the industrial commodity space. Within the broad industrial commodity space, I've got an eye on iron ore - a commodity that has proved to be somewhat resilient in 2020 and one that has seen a spike this month (up c.26% from April lows), mainly on account of supply-side issues. I will now provide some context on what's happening in the iron ore space and some of the key developments that investors need to look out for, which could likely impact iron ore and iron ore-related investment assets.

Things to watch out for

Chinese industrial data, export demand, and any infrastructure stimulus

First things first, China

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This article was written by

Michael A. Gayed, CFA profile picture
Michael A. Gayed is portfolio manager, and author of five award-winning research papers on market anomalies and investing. He has a BS with a double major in Finance & Management from NYU Stern School of Business, and is a CFA Charterholder. Michael runs the investing group The Lead-Lag Report, focused on helping investors outperform in all market conditions. It offers a tactical, data-driven approach to investing, to achieve long-term success even in the face of uncertainty. With increasing market volatility, it's essential to understand risk-on/risk-off signals, seize high-yield opportunities, and leverage award-winning research to maximize returns. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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Comments (5)

Good article. Thank you. I’m still long BHP although I wish my crystal ball had’ve told me to sell pre-Covid. Made back my losses now, though.
Thanks for very good article.
Another pure play IO producer to consider is Champion Iron out of Quebec.
ContyC profile picture
Good article. I am following the iron ore market for a few years since I have a position in BHP. I think Iron Ore is very dangerous when above $100, because it is extremely profitable for all miners at those levels, and it can incentivize capacity expansion.

The good thing is the huge mine expansions and new mines of the last decade are already producing, and the big miners seem to be a little more conservative about expansions now, so hopefully they will not pursue growth at the expense of profits. If they are smart, they are in a position to generate huge cash flows every year. Anyway, since iron ore fluctuates a lot, I think the miners are a strong buy when iron ore is at about $60.

A good opportunity can appear if what happened in March (a global selloff) repeats this summer. BHP can get dragged down because of oil and copper, and you can get it at a very discounted price during a downturn even if iron ore prices remain elevated. It's nice to buy a hugely profitable company at the price of loss making oil majors.
Little, Einstein profile picture
Ok, Buy in August
Thank you for an interesting article. I'm new to base metals so welcome the broad approach and mention of potential 'players'.
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