The boom is back: Iron ore price surges

Is it a dead-cat bounce or a recovery?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 12, 2012 4:57 pm AEST

Australia's iron ore miners can heave a temporary sigh of relief. The iron ore price has risen 12% in the last two days, and is now back over US$100 a tonne.

Overnight the commodity jumped 6.7% on news that China has approved more than $150 billion of spending on rail, roads, ports and other infrastructure construction projects to ramp up growth. That's around 25% of what the country pumped into infrastructure spending between 2009 and 2010.

Forecasts by Fortescue Metals Group's (ASX: FMG) CEO, Nev Power and chairman, Andrew 'Twiggy' Forrest that the iron ore price would rebound from the recent lows of under US$90 a tonne may be right. Whether prices will go back up to US$150 a tonne is another issue. Reuters notes that steel futures prices in Shanghai are still falling, adding to views that the iron ore price surge could run out of steam shortly.

Still, the news of further China stimulus is welcome news for our largest iron ore miners, including Fortescue, BHP Billiton (ASX: BHP) and Rio Tinto Limited (ASX: RIO), with a large portion of their earnings derived from iron ore.

With China focused on keeping to its stated growth target of 7.5%, we could well see more stimulus poured into the Chinese economy in the near future, should the country appear to be slipping away from meeting that target. Although an apparent oversupply of steel could mean it will take some time for China to absorb before demanding more iron ore and coal raw materials, so we could yet see the iron ore price fall back before recovering again, as demand picks up.

For Australia's junior iron ore miners, like Atlas Iron (ASX: AGO) and Mount Gibson Iron (ASX: MGX), it could be a rough few months of lower iron ore prices, before it begins to pick up, as the China stimulus works its way through the system.

The Foolish bottom line

Sooner or later, China's demand for raw materials will decline, as it moves to a more consumer-oriented society, and will no longer need the millions and millions of tonnes of steel it produces. That's inevitable, and as steel demand falls, its likely that iron ore and coal prices will follow. It appears too early to say whether this is a 'dead-cat' bounce or a short-term recovery in the iron ore price, but the long-term view seems fairly clear.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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