Let the Iron Ore Wars Begin!
The iron ore price is quickly becoming a focal point in the dispute between resource bulls and bears. It's kind of like a Rorschach blot test for investors. What you see in the price may tell you more about yourself than it tells you about iron ore.
But the objective facts are the same no matter who perceives them. At $150.90 per tonne, the spot iron ore price is at a 15-month high. It's up 70% from the August lows last year. Those are the facts.
Another fact is that Fortescue Metals Group (ASX:FMG) is up almost 60% since closing at $2.97 on September 6th. It even closed at $5.04 on January 3rd. Andrew Forrest's little darling requires high iron ore prices to be viable. The recovery in the spot market came just in time.
Deutsche Bank analysts aren't convinced, though. They slapped a 'sell' recommendation on the shares earlier this week. Analysts hardly ever tell investors to sell anything, so this must be serious. And sure enough the DB boys say the current share price is factoring in a spot price of $150/tonne until 2015, which is a long time from now.
A lot can happen in a couple of years. But the real debate here is over the long-term, big-picture outlook for China and commodities. If China's steel boom is over, Australia's iron ore boom is over. The spot price will settle at a lower long-term level. Mid-tier and junior iron ore producers will struggle. Their shares will struggle more.
Credit Suisse analysts reckon the recent rally was more like a swan song for resources. They wrote that it was 'one last hurrah' for the iron ore price. They expect $90/tonne in 2015. So there's a question for you: who stays in business at $90/tonne and who doesn't?
Yesterday we chatted for about an hour with Diggers and Drillers editor Alex Cowie. We can't reveal everything that was said. But if our suspicious are correct, the good doctor is about to hit back at all the resource doubters and China bears. He says he's prepared to back his judgement with several new share tips in his January letter.
Greg Canavan was not around to dispute him or challenge him to muskets at dawn. Our co-editor here at The Daily Reckoning is enjoying some much-needed time with his wife and newborn daughter. But Greg has already gone on record with his forecast about China, and what it means to Australia. You can read his 'Fuse' report for all the explosive details.
But speaking of iron ore demand and China, one thing that would surely support more iron ore demand is a shooting war between Japan and China. Murray wrote yesterday about the currency policies of the new Japanese Prime Minister, Shinzo Abe. But let's not forget what you can do with all that new money: buy guns.
The new government announced yesterday the first increase in the Japanese defence budget in ten years. What's more, the Japanese Defence Ministry will ask for a kind of 'stimulus package' to upgrade its air defences. Both increases - total spending and stimulus - are relatively modest. You're talking $2 billion in stimulus and a total budget of $61 billion, or just over 1% of GDP.
As the saying goes, however, from little things big things grow. One area to keep your eye on is the margin between Japan and China, namely the Senkaku Islands. Look for the old rivals to push each other via drones. The UK Guardian reports that Japan and China are already engaged in a kind of arms race over drone technology.
We won't...drone on...about the future today. But it's coming, whether you like it or not. In the meantime, back here in the present, retail sales in Australia were down month-over-month, according to data from the Australian Bureau of Statistics. Reported sales were $21.55 billion in October but $21.53 billion in November.
That is such a small change that it's not alarming. And remember, these are surveys, not precise measurements. The ABS said department stores, hardware stores, and furniture stores all reported lower sales. The strong Aussie dollar is probably luring some Australians to buy those things on-line from overseas, where they are much cheaper, even when you include shipping.
We'll give you an example. We're looking for a desk-top microphone to plug into our computer so we can begin some Daily Reckoning podcasts this year. You can buy the microphone in the US for about $90. Here in Australia, anywhere from $180 to $200. Even with shipping, it's a no brainer.
The dollar powers onward and upward, however. It costs 105 American cents to buy one Aussie dollar now. The trade deficit numbers, the debate over iron ore, the retail sales, none of it matters. The next big data set? China's fourth quarter GDP numbers this weekend. Stay tuned.
Dan Denning,
For The Daily Reckoning Australia