What happened to the ORI share price?
Orica Limited [ASX:ORI] was down 1.35% by 3pm today. The stock was trading at $20.88 a share. The Aussie Market was doing better after it received some encouraging news from the Reserve Bank today. The Reserve Bank May meeting minutes signalled that further easing is not out of the question.
Of course it is not out of the question. When the Reserve Bank said it will not lower rates again in the near future last month, the market panicked. That was when contrarian investors bought more. Central banks operate through expectation management. They will always say one thing and do another.
Right now, the Reserve Bank is trying to do two things. One is to lower rates when the economy tanks further. The other is to say that it will not lower rates further so as to better manipulate inflation and interest expectations.
One thing investors need to remember is that central banks are very data-dependent. When the economy is not going well and there are no significant inflationary risks, they will cut. That is good for the equity market and the property market.
Why did this happen to ORI shares?
Orica, the world’s largest mine explosives supplier said on Tuesday that 2015 would be the bottom for the mining industry. This sent Orica shares to a nine-month high.
Investors should already be quite comfortable with the notion of a reflation in iron ore price in 2015. A reasonable price would be US$65 a tonne by year end. The truth is we have already bottomed in terms of price. Things will get better from this point.
Demand in China will increase as a result of aggressive monetary easing. Supply will reduce as a result of cuts from the majors.
What now for ORI?
Over the long term, demand for iron ore from China and India will continue to support price. This means a blue-chip like Orica is a good bet over the long term. The stock has come down over the last few years. However, there is no real undervaluation in Orica’s share price. We are looking at a gradual gain in its share price over the long term after 2015.
Emerging Market Analyst, New Frontier Investor