4 Things To Look For Before Iron Ore Bottoms

Chris Lau, Kapitall: The drop in the price of iron ore is not showing signs of reversing. Even though investors want to pick a bottom for companies in this sector, the downside bias remains. Investors should build a check list of things that must happen before taking a position in companies like Cliffs Natural Resources (CLF), Rio Tinto (RIO), and Vale (VALE) . Shares are up for the month:

…but are down for the year:

A checklist will help investors set a stricter level of discipline. By differentiating between an actual reversal in prospects for iron ore companies from the hope of one, investors may reduce there losses.

Checklist

1.  Stronger Economic Activity in China

Iron ore prices dropped steadily in the last 3 months, led by a weaker economic outlook in China. China lowered its longer term growth goals for the year. Until iron ore supplies moderates, iron ore prices could continue to fall. Iron ore was around $112 a metric ton.

2.  Lower Mine Production

Cliffs already lowered CapEx for mine development, but Rio Tinto is expected to continue the expansion of its mines in Australia. To offset a decline in deposits, Vale is planning to expand output in Mariana, Brazil.

3.  Muted Worries for European Economy

Although concerns for the European economy were muted in the last few months, if it is renewed again, investors might continue to sell iron ore producers.

4.  Stable Steel Prices

Steel prices dropped around 5% in the last month, due to excess supply and inventory. Until supply eases, lower prices will be a drag on iron ore.

 

Other Considerations: the Macro

Macroeconomic weakness is being forecast, which contributed to a drop in iron ore producers. The OECD cut its global economic growth outlook, but this does not mean iron ore companies will keep falling. The companies will simply react by lowering their operational costs and cutting production. 

Of greater importance are central bank decisions to continue quantitative easing. This will matter more in the intermediate term, because global growth depends on it. Easing will probably continue, though bond yields are now rising. The recent sudden drop in bond prices is a concern. If this continues, then look for more pressure on the iron ore producers.

Written by Chris Lau, Kapitall Wire contributor. 

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