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Why Have Iron Ore Equities Had a Bad Run in Past Month?

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Iron ore prices

Iron ore prices have had a very bad run since mid-October. Prices have fallen by 14%, taking the total fall in iron ore prices to date to over 30%.

While China’s iron ore demand remains weak in an oversupplied steel market, the iron ore inventories at the ports have started inching up. The supply side has added fuel to the fire. The latest quarterly production results released by the big three iron ore companies, BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Vale (VALE), have been very strong. They’ve also maintained their production guidance. The recent accident in Samarco will have some impact on the supply side, but it will not be enough to offset the supply coming online (Roy Hill is expected to start shipping in November) and weak demand.

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Iron ore stock price performance

Along with the fall in seaborne iron ore prices, iron ore equities have also taken a plunge. Since mid-October, Vale and BHP Billiton have fallen by 23% and 21%, respectively, while Cliffs Natural Resources (CLF) and Rio Tinto have plunged by 17% and 14%, respectively.

While Vale’s and BHP Billiton’s poor share price run can be partially attributed to the accident at Samarco, the demand-supply fundamentals are also to blame, haunting the iron ore equities in general.

Cliffs is not directly exposed to the seaborne iron ore prices, apart from through its Asia Pacific iron ore division. However, its contracts have clauses for seaborne iron ore prices as well as steel prices in the United States (SPY) (IVV). China and other countries are exporting surplus steel to the rest of the world, including the United States, which is hurting the US steel industry, and in turn, the major pellet producer to these units, Cliffs. Cliffs’s high debt isn’t helping its stock price either.

ETFs such as the SPDR S&P Metals and Mining ETF (XME) are good ways to get exposure to this sector without selecting individual companies. Cliffs forms 3.4% of XME’s holdings. Vale forms 2.9% of the iShares MSCI Brazil Capped ETF (EWZ).

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