The End of the Iron Age?

03/21/2013 9:49 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

The price of iron ore may be peaking, either now or fairly soon, according to both government and analyst estimates. MoneyShow's Jim Jubak explains the implications for the industry.

This is clearly a long-term worry.

Australia’s Bureau of Resources and Energy Economics bucked the recent Wall Street trend by upping its forecast for iron ore prices in 2013. Yesterday, the bureau raised its forecast to an average of $119 a metric ton for 2013, up from a December forecast of $106 a ton. (The bureau forecasts prices at Australian ports.) Iron ore shipments will rise to 554 million metric tons in 2013 from 488 million tons in 2012.

However, Goldman Sachs cut its estimate to $139 a metric ton...and on March 7, Morgan Stanley projected that the price of iron ore had peaked and would decline for the rest of 2013. (Goldman Sachs uses a price pegged to iron ore delivered in China, so its figure of $139 a ton isn’t really comparable to the Australian $119 a ton.)

Shares of the world’s big iron ore miners, which have been under pressure lately, were mostly up on the Australian projections (and on optimism that the crisis in Cyprus won’t take down the global economy.) Shares of BHP Billiton (BHP) closed off a few pennies, but shares of Rio Tinto (RIO) and Vale (VALE) are each up 1.3%.

But to me, the big news out of the Bureau of Resources and Energy Economics isn’t the optimism on this year’s price for iron ore, but the bureau’s longer-term pessimism. The bureau sees a wave of new supply from projects already underway hitting the market over the next five years. By 2018, it projects, the Australian port price will fall to $96 a metric ton.

The bad news in this may actually be worse for companies that sell mining equipment than for the miners themselves. Mining companies have reacted to falling prices for ore—and projections of big increases in capacity—by scaling back their capital spending plans. That will increase their margins at least in the short term.

Mining equipment makers, such as Joy Global (JOY) and Caterpillar (CAT), don’t have that option. Lower capital spending by miners means slower revenue growth.

I don’t think we’re reached a long-term turning point for either iron ore mining stocks or for equipment makers. In the short-term, though, these stocks are likely to fluctuate with optimism/pessimism about economic growth in China and the country’s demand for iron ore.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.

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