‘So Steve, your fund is up 20% in the past 12 months. How do we invest in this Intelligent Investor Value Fund?’
Unfortunately, that bit didn’t make it into last night’s 7.30 Report. But we did get quite a good run in Stephen Long’s piece on the China boom. You can watch the online version here if you missed it.
China’s unsustainable infrastructure binge is starting to wane, with ample evidence of rising inventories, commodity stockpiles and mass overproduction. The iron ore price is down 25% in the past few months and more than 30% in the past year. Not that you hear that from the Australian broking community. I got an email this morning from a Perth-based broker (with a very long list of mining buy recommendations):
The mining service companies have generally performed well this reporting season with results coming in broadly in line with expectations and as a result the respective share prices rising. We expect HDX to follow this trend.
Did anybody really expect 2012 to be a bad year for mining services? I would expect 2013 to be quite healthy too – there’s enough work locked in to guarantee it. It’s 2014 that you’ve got a problem. Potentially a very big one.
A final point. I’m seeing a lot of bulls claiming $120 is the price floor for iron ore. That, apparently, is where the marginal producers stop producing (this FT Alphaville blog post contains a JP Morgan cost curve). There are two problems with this.
One, it assumes demand continues to grow at a moderate pace (the low cost producers continue to expand low cost output). Which also assume China builds just as many airports, roads, train lines and houses as it did last year. That’s a big assumption.
Two, it assumes the marginal producers stop producing as soon as it is economically rational to do so. That often doesn’t happen in Australia (witness the recent bail out of Australian steel producers). It’s even less likely in China, where jobs are far more important than profits. As the Chinese represent the majority of marginal iron-ore production, there is no guarantee that loss-making producers will halt production. In fact, I would say it is highly unlikely.
In short, the $120 floor is unlikely to be a floor at all.