Market Overview

Iron Ore Prices Expected To Continue Slide; Morgan Stanley Sees Future Upside


Iron Ore prices have dropped over 30 percent year to date. Stock prices of Iron Ore miners have hardly reacted with Fortescue Metals Group Limited down 27 percent year to date.

Iron Ore 62% FE - August Contract From CME Group:

Miners YTD Performance (Chart: Capital IQ)

Morgan Stanley analyst Joel Crane believes Iron Ore index is headed for a sustained collapse before rebounding. He cites the recent downward pressure on steel billet and rebar prices in China thanks to elevated steel construction and a seasonally slower consumer period. Adding to these pressure is the tendency of steel makers to "...adopt a ‘wait and see’ approach during bouts of price weakness to see how low it can go“.

Axiom Capital Gordon Johnson asked Mysteel's Head of Iron Ore Analytics about inventory levels of Iron Ore and current Chinese demand levels.  Mysteel’s head said regarding days/levels of steel mills: 

“...though they are higher than that of Q3 in 2012….the stockpile at ports will exceed 110 million tonnes, way above reasonable level”.

Morgan Stanley believes the decrease in Chinese domestic iron ore production is driven by mine closures leaving those remaining firms in a stronger position even as freight rates for seaborne activity have risen, leading some to believe less miners are producing more iron ore.

Traders and investors seeking exposure to the Iron Ore volatility and potential "replenishment buying" that Morgan Stanley expects may decide to analyze the suitability of these ETFs:
  • Market Vectors Steel ETF (NYSE: SLX)
  • iShares S7P Global Materials ETF (NYSE: MXI)

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