This post is based upon an interview with Gordon yesterday. Gordon is a stockbroker and  principal with Morgans’ Caloundra office. Morgans are sponsors of marketcap.com.au. Contact Gordon here.

China and Iron Ore

Gordon considers that Western markets have a “bipolar” view of China. Minor economic improvements cause the bulls to rave, while minor downturns have the same effect on bears.

These view are based upon data that “are flawed at best and manipulated at worst”. However he does believe that while growth has slowed, the Chinese economy is still growing and thus demand growth for raw materials will continue.

China is in transition from capital expenditure to consumption expenditure. No one can predict how this will end up, but Gordon is optimistic. “The typical Western view of China is coloured by the difficulty in implementing reforms in the West. China is not hamstrung to the same degree, if at all”.

While there are record stockpiles of iron ore at Chinese ports the actual tonnage is “below the long term average when compared to annual steel production”. Current prices are probably around the cost of production for Chinese iron ore. Significant price falls from here are likely to reduce Chinese production, thus benefiting other producers such as Rio Tinto Ltd (ASX:RIO).

Gordon recommends RIO as the standout iron ore investment. “It has the best quality ore and the lowest production costs. It is less polluting than other ores and has much lower shipping costs than Vale, which has comparable quality”.

Further, “a prudent investor would switch from Fortescue Metals Group Ltd (ASX:FMG) to RIO. FMG is well run but has much higher costs and lower quality ore than Rio”.

Thanks Gordon. I guess RIO shareholders would not be too concerned with further falls in the iron ore price? “Not at all, Mark”.

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12 June 2014 Markets