In a 32-page report released on Friday, Liberum reiterated its expectation that iron ore will drop back towards $US50 a tonne later this year, and towards $US40 in 2020.
“We believe the demand weakness will crystallise in the second quarter just as seasonal supply recovers and look to our short-term Restocking Indicator, which is currently on a buy signal, to reverse. We maintain sell ratings on BHP, Rio Tinto, Anglo American.”
Vale had a 24 per cent share of the seaborne iron ore market in 2018, with Rio at 23 per cent and BHP at 19 per cent, according to Fitch. It had Fortescue at 11 per cent.
Avoid Anglo American, look to Glencore
Liberum said it believes “that all the iron ore exposed equities are expensive at this point, particularly after Vale’s supply shock, which we believe is overdone”.
“We believe that high-grade lump is particularly exposed, with premiums to fall with the benchmark iron ore price, putting Anglo American as our least preferred in the space.
“The ongoing annual pellet premium contract negotiations at Vale will undoubtedly benefit Ferrexpo, but following this catalyst, it remains exposed to benchmark iron ore prices and is a higher-cost operation. Following these two would be Rio Tinto and BHP.”
Key to the bleak price outlook is Liberum’s belief that demand for steel from China’s real estate market is about to wane. “The clearest indication that housing is going to continue to deteriorate for the next six months is the ongoing tightness in credit.”
In fact, Liberum sees “multi-year” weakness in property demand as government subsidies to redevelop shantytowns has disappeared, knocking speculative home buying and as developers have churned through their owns funds amid tighter mortgage and credit markets.
Don’t be on China infrastructure boost
While there are signs the Chinese government may seek to bolster economic growth with infrastructure spending, Liberum said “the commodity intensity of infrastructure spend is a fraction of that in residential housing, particularly in lower-tier cities, because of the associated civil engineering costs”.
Liberum also said that while the data has been less clear, there are signs that the level of inventory at steel mills may higher than a year ago. “With the continuing strength of steel output versus end users expectations, it is possible that the steel mills have overproduced during the winter period and demand will be slack in the year ahead.”
Liberum said its restocking indicator has flipped from sell in December to neutral in January to buy this month. “These changes were driven by new orders changing from contraction to expansion, and the depletion of finished goods inventories that will have to subsequently be replaced.
“We are bearish on iron ore on a six-month view, but it would certainly give us increased confidence on timing the call if the restocking indicator downgraded to at least a neutral signal.”
Liberum’s simple advice to investors – “fade the iron ore rally”.
from Just News Viral http://bit.ly/2BgXsa9
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