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Why Now’s a Bad Time to Invest in Iron Ore Stocks


Written on 18 January 2012 by Kris Sayce

Why Now’s a Bad Time to Invest in Iron Ore Stocks

In 2010, Australia exported 402 million tonnes (mt) of iron ore.

That made it the world’s largest iron ore exporter… That 402 mt made up 40% of all world exports.

The Australian Bureau of Agricultural and Resource Economics (ABARE) forecasts Australia will have exported 414 mt in 2011… and will export 459 mt this year.

And based on this week’s numbers from Fortescue Metals, BHP Billiton and Rio Tinto, there’s a chance ABARE has misjudged the true number.


Because as it says in today’s Age:

“BHP Billiton, the world’s biggest miner, expects to beat its full-year iron ore targets after first-half production rose by 23 per cent.”

It’s a great time to be an iron ore miner.

But is it a great time to invest in iron stocks?

The answer is “no”… And in a moment we’ll show you which commodity could be a more profitable investment for you.

Before we do… Slipstream Trader, Murray Dawes has just recorded and posted his latest free stock market update video on YouTube. You can watch it now by clicking this stock market update link

But for now, back to iron ore…

Iron Ore Price Heading Lower

So, what’s so bad about iron ore?

The following chart shows you:

monthly contract price for iron ore
Click here to enlarge
Source: Indexmundi.com

 


It’s the monthly contract price for iron ore. The price has peaked and is heading down.

Remember, until recently, the practice in the iron ore market was for yearly contracts. The big players would negotiate a price at the start of the year and that was it.

It was a good way to be sure of sales and the price. Trouble is, as iron ore prices went up, the big exporters could see how much they were missing out on due to fixed price contracts.

So it didn’t take long to convince the Chinese that monthly contracts were better. Only now, the iron ore price is falling. And that means less certainty about future revenues.

For instance, BHP announced a 23% increase in iron ore production from the previous year. That’s great news. Except the average price is 11% lower, and more importantly, the average price for the next quarter could be 30% less than the same time last year.

Investor reaction tells you there isn’t much to get excited about when it comes to BHP. The shares have done nothing today and haven’t moved much in the past few weeks.

Better Than Iron Ore

But, there was one clue in BHP’s production numbers worth paying close attention to. It’s this table:

BHP's production numbers
Click here to enlarge
Source: BHP Billiton

 


It’s a commodity we believe is better and has more potential to make Aussie investors gains than iron ore. We’re talking about natural gas.

Cheers.
Kris.

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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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1 Comments For This Post

  1. Trading Coach Says:

    Thanks for this information. I will be sure to keep checking on the progress of the ore stocks.



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