Iron ore strength hiding in plain sight

Here are three things I’m thinking about today…

1)

I’m putting together my monthly report. It’s late April. Tariffs are roiling markets. Something strikes me as odd.

It’s the iron ore price.

Huh?

You see…

Most things I’m looking at – US stocks, bitcoin, US bonds, Aussie shares, oil – are going down.

Yet iron ore is doing…nothing. It started the year about US$95-US$100 a tonne.

And in April it was still at that level…despite Trump going on hard on China.

It left me with no other conclusion. The Chinese economy was doing better than presupposed.

That gave me comfort making the recommendation in that report.

That brings us to today.

That share price is working for me so far – up 28% at the end of yesterday. It hasn’t even been a month yet.

Here’s why I mention it.

I came across a handy bit of info from Wilson Asset Management yesterday.

Wilson says that there’s strong demand for Chinese assets despite the recent volatility and trade tensions.

Why do we care?

The People’s Bank of China has two constant headaches.

One is supporting the Chinese domestic economy. Another is supporting the yuan – the Chinese currency.

Wilson conclude:

“There is scope and funding for Chinese policy makers to stimulate their economy, without fearing the constraints of capital outflows.”

This showed up last week with policy makers cutting reserve requirements for the banking [CN1] system.

A strong China is good for markets – especially resource markets.

OK. I get it.

There is a barney about whether this stimulus will go into services, goods or infrastructure, and therefore how much commodity demand will lift.

I don’t know. But the price of copper is holding up right now as well.

Neither copper or iron ore are not signalling bearishness currently.

(I recommended a copper developer in my January issue: it’s up 48% so far. It did get crunched in the April sell off, I should say, too).

We tabled energy stocks yesterday. Oil was up in the US session overnight. But…

2) What about iron ore stocks?

I nearly recommended an iron ore stock in April. I didn’t. It was seriously tempting.

Iron ore stocks were sold down hard on the trade war fears. As above, iron ore itself did not sell down.

I LOVE when this happens. Why?

You can buy the shares much cheaper, knowing that, odds on, they will revert to their previous levels as the fear subsides. The cash flows are there to support it.

And if the price of iron ore DID eventually go down?

Well…not ideal…but the market has already priced that outcome in – that’s why the share prices are down remember… and you’re less likely to get slammed.

See this in action via Champion Iron ($CIA)…

It peaked around mid-February, and started sliding well before “Liberation Day”.

By April 9, it was under $4 per share and off 45% from the October 2024 high.

There was a lot of bad news battered into by then. You could reasonably go the other way.

And what do we see?

A 20% bounce so far.

But I neither bought CIA or recommended it.

In the end, I decided that, while iron ore was holding up, it wasn’t clear to me that it could lift strongly, so CIA (and $FMG, $FEX etc) might just go sideways for ages.

There were more compelling ideas over the longer term. We’ll find out if I was right in 12 months.

But do keep watching from here still…

3)…Because Rio has a grade problem

Rio Tinto ($RIO) is now telling customers to expect a lower grade from its benchmark blend.

Iron ore is a bit like oil, in the sense there’s variance in the grade, quality and price for different blends.

Fortescue, famously, cops a discount most of the time for its lower quality ore.

Rio is now facing a structural dip in its market pricing power. Not huge, for the moment, but there.

In fact, all of Australia’s iron ore industry is looking weaker on this front than is preferable.

One reason is that the steel industry is highly polluting and responsible for a big chunk of emissions.

Steelmakers need to use higher grades to offset this.

The less impurities they need to extract, the less power and coal they need to burn. That puts high grade iron ore producers in the sweet spot.

Most of these are in Canada and Brazil, plus Russia and Ukraine.

It also makes me wonder about iron ore price assumptions. Everyone tends to talk about tonnes shipping out, but it’s actually iron ore units that matter to steelmakers.

Structurally lower grades from an important supplier like Australia could support iron ore pricing over the medium to longer term.

I can’t be certain, of course, but make the most of it while it lasts.

Ongoing high iron ore prices support Australia exports, the dollar and the government budget.

The outlook for Australia and the ASX looks at least solid while iron ore pricing strength continues.

Best,

Callum Newman,

Fat Tail Daily