Does size really matter? – Iron Ore

Iron Ore does size really matter

Well I guess it depends on who you ask and what you are talking about, but when it comes to Iron Ore, it would seem so!

Reports and Research

Over the past week, being on the “flying library”, I have had a chance to catch up on a few things, one of which is some research. I read a variety of reports across the iron ore sector, to get a broader perspective and evaluate my outlook and thoughts. One thing that came through loud and clear, is that in the current climate, size does matter!

Iron Ore – Indian Market

Firstly, lets consider an enormous market, that of India – but not as the consumer of, but producer of Iron ore. In the Goa region, in Southwest India, a 1.5m tonne a year mine, largely for Chinese export, sits idle, as government action relating to pollution and unlicensed production. Such closures along with others in the region, have resulted in a 70% fall in Iron ore exports and move India closer to becoming a net importer of a commodity it has un the ground in vast quantities. An interesting move, given the resurgence in global iron ore prices.

This is really a function of the structural weaknesses that continue to plague India. Some historical issues, such as corruption, being just one element. There is also a call for stronger political leadership – GDP growth is slowing, the Rupee is weakening and infrastructure is in major need of development.

Please don’t misconstrue this as doom and gloom, as opportunity comes wrapped in many forms. As China matures from its insatiable demand for resources, primarily from an infrastructure perspective, India will be waiting in the wings. And major iron ore producers will continue to be amongst the beneficiaries (as will those who trade those stocks)

Cape Lambert – Rio Tinto

Across the Ocean, at Cape Lambert, things really couldn’t be any different. RIO (ASX:RIO), which has been expanding nicely on the back of China’s boom, now produces almost 240m tonnes of iron ore annually – with a cost somewhere between 30 and $50/tonne. Nice work if you can get it, particularly with iron ore prices stabilising at around the $130/tonne mark. Against this backdrop, Rio is actively expanding capacity from its Pilbara resources, with the view of ramping exports up to 360m tonnes per year. The scale of this is simply overwhelming.

Junior Players Against RIO and BHP

Meanwhile, amongst the junior iron ore plays, times remain tough. Atlas Iron has been the centre of take over rumours for some time, while its share price remains stubbornly below $1, a far cry from $4 plus just a year or so ago. Compressing things for the “juniors”, is their cost of production, which simply sits far higher than the more established sector giants – RIO (ASX:RIO) and BHP (ASX:BHP).

In terms of RIO and BHP themselves our current trades on these range from covered calls on BHP, as well as an Iron Condor – call it an Iron Ore Condor – on BHP and RIO, where we have a more bullish view on BHP vs RIO and are using options to help exploit and profit from this view. This position is still open and currently is siting right in the sweet spot!


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