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.
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.