Chinese Demand Creates More Volatility in Iron Ore and Blackmores Ltd

Iron ore has been one of the most volatile commodities this year. We’ve seen iron ore trade as high as US$94.91 a tonne in early February and as low as US$53.36 a tonne recently. A big reason for the price volatility is speculation.

Commodity traders buy and sell iron ore based on Chinese steel inventories. The Australian Financial Review explained:

The bulk commodity’s spot price hit a 12-month low on Wednesday and futures also fell amid growing concern that a slowing Chinese property market may dent steel demand.

China’s hurt the Blackmores Share Price

But it’s not just iron ore. Chinese demand is also causing havoc for vitamin companies like Blackmores Ltd [ASX:BLK]. The stock has fallen more than 15% year-to-date. And according to the AFR, their decline has a lot to do with buying patterns in China.

The stock soared as high as $220 in January, 2016 on buoyant demand from Chinese buyers but regulatory uncertainty in China and a subsequent slowdown in appetite after a bout of boisterous buying punctured confidence.

But not only is Blackmores facing heat abroad, their profits are also at risk from a domestic price war.

The AFR continues:

Chemist Warehouse is currently selling Blackmores Bio C vitamin C tablets at 55 per cent off their recommended retail price, while calcium and magnesium tablets are also more than 50 per cent off under a big catalogue discount special which also includes a large range from rival Swisse.

Supermarket chain Woolworths is also offering 25 per cent off Blackmores Women’s Vitality vitamins, and 19 per cent off Blackmores’ calcium and magnesium tablets.

Coles has some Blackmores’ products on promotional specials but discounts are particularly aggressive for the rival Cenovis vitamins brand.

Volatility is opportunity

Investors with an overexposure to China are on a wild ride. Companies who produce iron ore, infant formula and vitamins have likely seen their positions trend up and down by turns.

This short-term volatility is a big reason why investors lose money. Their position trends down much further than they thought, and the fear of losing more is too great, causing them to sell out at a loss.

But you can use short-term volatility to your advantage. The market price rarely matches the intrinsic value of a business. Therefore, when the market pushes shares down on short-term troubles or because the industry is out of favour, you have an opportunity to buy something for less than its worth.

With that said, cheap stocks aren’t always the investments you want to buy. But if you’re confident on the future outlook for the company, you can pick up bargains when the market chucks a hissy fit and turns down.


Härje Ronngard,

Junior Analyst, Money Morning

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