Fairfax media covered a report by international research house CLSA this morning that indicates that the worst could be over for the iron ore sector.
According to the report by analyst Ian Roper, there will be no net growth in supply in 2015, which is a significant improvement from supply increases previously forecast in September 2014 and February this year.
The capacity dropping out of the market – from high cost producers, and BHP Billiton Limited's (ASX:BHP) deferred port expansion – looks to be sufficient to equalise excess capacity coming online from expansions at Rio Tinto Limited (ASX: RIO) and Gina Rinehart's Roy Hill mine.
Curiously the CLSA report forecast a supply excess of 50 million tonnes in February. Want to hazard a guess at the size of BHP's deferred port expansion? 50 million tonnes.
(Contributor Brendan Lau covers BHP's deferred expansion in his excellent article here)
It's a stark reminder just how much control the major miners exert over the market, and it's no surprise that many including Fortescue Metals Group Limited (ASX: FMG) have called for government intervention, or even a loose cartel-like arrangement to firm-up prices in the sector.
But since the supply glut has halted, Atlas Iron Limited (ASX: AGO) can return to the ASX, Fortescue can pay off its obscenely expensive bonds, and all will be well. Right?
Probably not.
Assuming CLSA's forecasts are correct, iron ore is expected to trade at around US$55 per tonne for the third quarter of 2015. That's still below Atlas' break-even point and, although it provides OK margins for Fortescue, definitely won't turn that company into a blue sky investment.
Furthermore the iron ore supply situation apparently rests on the magnanimity of Rio and BHP, and continued Chinese demand.
Imagine for a moment that BHP starts losing its share of the iron ore market as Rio's expansion and/or decreased Chinese demand push it out.
Would BHP take that lying down, or would they increase production to take back lost ground?
Your guess is as good as mine, but either way the iron ore sector is not the best place to be right now.
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