Oh dear!

Oh dear!

According to the Australian Financial Review’s Amanda Saunders, “China will help to bankroll a major expansion by Brazilian iron ore giant Vale and invest in huge Vale ships that will transport high-quality ore to North Asia – a deal that will reshape the global industry.”

This has serious repercussions for investors betting on a turnaround in the prospects of iron ore giant Fortescue Metals Group (ASX: FMG). When BHP Billiton Limited (ASX: BHP) recently issued debt at 0.87 per cent over bank rates (3.15%)and Fortescue at over 9.50 per cent, we wondered whether the deal was already sealed. The debt market certainly believed so.

This deal however with Vale, by the Chinese, could well seal the fate of Fortescue. It guarantees enormous iron ore expansion over the coming three years (during a period of potentially negative demand growth) and ensures a material reduction in Vale’s shipping costs – making Vale even more competitive on an all-in delivered cost basis.

Perhaps more importantly for Aussie mortgages, all of this is deflationary for the global iron ore price, which could put further pressure on Australian growth and interest rates.

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery, find out more.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.