Editor’s Note: In these fast-moving markets that could just as easily go down as up (and just as fast), my colleague JR Crooks has been adeptly trading them and showing his subscribers how to make money on both the long and short side. And in his video below, he’s got some timely information on a soaring sector that’s about to get into serious trouble … and how you can play it for profits. — Monty |
Iron ore prices have remained extremely high despite a global decline in steel demand. Today I’ll talk with you about who is propping up this market … what happens when this major market player runs low on money to pay for all this (over)production … and how you can profit when prices can no longer stay afloat.
Best,
JR
Video Transcript
Hi, this is JR Crooks for Uncommon Wisdom Daily.
Expectations for global economic growth continue to decline. But despite the slowdowns in China and Europe, and the weak growth in the United States, iron ore prices have defied gravity.
One reason for this outperformance is that demand for steel, which uses iron ore as its main ingredient, has remained relatively stable. In addition, producers are operating under shrinking margins in order to keep their factories active and maintain market share.
This is particularly true in China, as you can see from this chart.
While steel production in the rest of the world seems to be topping out, China’s production has grown steadily since the 2008 financial crisis, which cut into global demand.
In other words, Chinese steel producers are almost singlehandedly propping up the market for iron ore. Right now, iron ore is trading at more than $135 per ton, while it costs a little over $30 a ton to produce. That’s quite a margin.
However, this situation can’t go on for too much longer. Iron ore stockpiles are exceptionally high in China. And thanks to the slowdown in manufacturing all around the world, steel producers simply can’t find enough buyers for all this inventory. So it’s only a matter of time before they’re forced to make production cuts.
When that happens, we’re sure to see a big drop in the price of iron ore.
So if you’re holding shares of major iron ore producers such as Vale or Rio Tinto, now is the time to sell. More aggressive investors may even want to sell these stocks short, or buy put options on them. You could even make a downside bet on a dedicated exchange-traded fund, like the Market Vectors Steel ETF, symbol SLX. It holds shares of major global iron ore and steel producers.
One thing that could keep iron ore prices high is a sudden, major improvement in the global economy. But going forward, I expect sluggish growth in the U.S., a continued slowdown in China, and very little progress to halt the European sovereign debt crisis. That means the market environment will remain risk off, and iron ore prices will fall back to earth.
I’m JR Crooks for Uncommon Wisdom Daily. Thanks for watching.
{ 2 comments… read them below or add one }
Looks like a new kid on the block. Be as it may, I’ll put those symbols on my watch list to see what unfolds.
One of the things I focus on is to hear a realistic anticipation of gain vs. risk. I would imagine any investor might jump in with both feet or avoid recommendations based on a risk to gain factor. Oh, by the way, maybe my thought could be passed to some of the other Uncommon Wisdom writers that make such recommendations. I’ve made some nice profits on recommendations that were spelled out. But there were a few were I didn’t make out too well. Which is OK.
Chart shows SLX at about $44 today(below 50 and 200 day EMAs), significantly down from high of 2012 of about $58 and high of 2011 of about $77. Weekly and daily support levels are currently shown at about $40.00. Vale has gone from about $37 in early 2011 to a high of about $27.00 in Feb. 2012 to about $20.00 now. So how does SLX or Vale show that steel or iron ore reflect prices were being propped up and now ready for a “reversal” or some kind of significant move down and now is the time is to sell if you are holding these equities?