Should You Sell Arrium Ltd Shares Today?

What Happened to the Arrium Share Price?

Arrium Ltd [ASX:BBG] was trading lower today. The stock retreated 1.11% by 12:52pm to trade at $0.222. This was after a flat opening on the Aussie market.

However, heavyweights such as Commonwealth Bank eventually pushed the market higher, offsetting the disappointing results from Woolworths. Energy prices went down again overnight, led by an abundance of crude inventory.

Why Did This Happen to ARI Shares?

There is not a lot of excitement around ARI shares. This is not very surprising given the latest disappointing results from Arrium. The company reported a $1.49 billion loss in net profit and a 12% decline in revenue in its latest results. There was no dividend declared, and net tangible assets contracted from $1.34 to $0.40.

Currently, most market analysts have a hold rating on the stock, with some believing it will underperform again. Despite a consensus view of higher sales and earnings per share next year for the company, investors are finding it difficult to invest into a deeply out-of-favour stock such as ARI.

The stock dropped from a high of $1.76 at the end of 2013 to the now less than 30 cents a share. The question investors keep asking is ‘has it bottomed yet?’

What Now for Arrium Ltd?

Everything has to do with the price of iron ore and the demand of China. There is no doubt that China’s steel balance and iron ore balance are undergoing a major structural change. What this means is demand is still weak and there is still oversupply to be worked through.

The price of iron ore has dropped by more than 40%, and that has been the direct cause for losses in many miners. So the outlook for iron ore price in 2015 is key to determining the value of ARI.

Unfortunately, given the current state of oversupply in both steel and iron ore, the price for iron ore will at best recover to about US$70 a tonne this year. A more realistic estimate for the iron ore price for the year is perhaps around US$60. This means the miners will continue to suffer.

For investors, the opportunity cost of investing into an oversupplied sector is very high. There will be a rebound in iron ore price due to expansion in total demand in the coming years. However, that will not happen until the end of 2015 at the earliest.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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