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A Year to Forget for Iron Ore Investors, What Lies Ahead?

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A year to forget

The iron ore rout has outweighed the fall in other commodities, including oil and copper. The benchmark seaborne iron ore prices have fallen by 45% year-to-date (or YTD). This is in addition to a ~50% fall in 2014.

The attractive prices of above $150 per ton reached in 2010 in the wake of China’s investment-led growth motivated large miners to expand their capacity. Also, many small players sprang up. However, after 2014, China’s slowing growth, coupled with burgeoning supplies from miners, contributed to iron ore prices coming under increasing pressure.

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Iron ore miners’ performance

All the major iron ore miners have lost value year-to-date. On a relative basis, Rio Tinto (RIO) has outperformed, losing 28%, while BHP Billiton (BHP) (BBL) lost 41%. Australian miner Fortescue Metals Group (FSUGY) fell 36%. Note that FSUGY is more leveraged.

On the other hand, Vale (VALE), geographically disadvantaged and still more leveraged, fell 60%. US iron ore producer Cliffs Natural Resources (CLF) fell 78% year-to-date. Although CLF’s US division isn’t directly impacted by the seaborne iron ore market, its high debt and higher steel imports into the United States contributed to its stock price fall.

Series overview

In this series, we’ll try to gauge the future direction of iron ore prices based on recent demand and supply dynamics, including China’s steel production and exports, its property sector performance, and credit growth metrics. We’ll also see what various analysts think about iron ore prices going forward. Finally, we’ll try to position iron ore miners in terms of their relative positions compared to the iron ore price and see if they can weather the downturn in the iron ore industry. The SPDR S&P Metals and Mining ETF (XME) invests in some of these stocks. CLF forms 3.7% of its holdings.

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