Pumpkins and Mice 2012?

Pumpkins and Mice 2012?

In light of my recent posts about China slowing, the price of iron ore under pressure from a gigantic supply response, our avoidance of BHP/RIO/FMG as investments and our profit taking last month in our mining services holdings…

In April, we warned more frequently than before that the mining boom appeared to be on shaky ground.  Of particular interest to us has been the support for Iron Ore prices even in the face of a very great supply response.

If you are keen to study our thoughts on Iron Ore and why we don’t own BHP currently and why we have already sold the bulk of our mining services holdings you can read the following links:

April 3)  http://rogermontgomery.com/mining-services-a-crowded-trade/

April 18) http://rogermontgomery.com/building-heaps-piles-at-bhp/

APril 11) http://rogermontgomery.com/will-china-demand-iron-or/

In 2010-11, world iron ore production grew 8.1% or 227mt to 2.8bt. Assuming similar growth levels in 2011-12  – in a classic supply response BHP production is forecast to grow by 20%, RIO by 30%, FMG 25% – iron ore production will grow to 3,037bt, an increase of 237mt.

And assuming China consumes 60% of global production again (highly optimistic), their demand would increase by 136.2mt. However moderating growth means current estimates for China’s iron ore requirements are half this level. With few other countries growing or competing heavily with China, who will pick up that supply overhang in a low growth environment?

By 2015 we estimate that two entire Pilbara regions (700mt) in supply terms will come onto the market. It’s a far stretch to expect China to absorb 420mt (60%) of that.  The impact we expect is pressure on iron ore prices.

And finally, just days after BHP and RIO said they are reassessing their development plans…This just flashed across our screens:

*DJ BHP Chairman: World Faces Increasing Volatility, Uncertainty

(MORE TO FOLLOW) Dow Jones Newswires
May 15, 2012 23:37 ET (03:37 GMT)
*DJ BHP’s Jacques Nasser: Australia One Of Higher-Cost Countries For Miners

(MORE TO FOLLOW) Dow Jones Newswires
May 15, 2012 23:38 ET (03:38 GMT)
*DJ BHP Chairman: Shareholders Have Lost Confidence In Health Of World Economy

(MORE TO FOLLOW) Dow Jones Newswires
May 15, 2012 23:39 ET (03:39 GMT)
*DJ BHP Chairman: Tailwind Of Higher Commodity Prices Moderating

(MORE TO FOLLOW) Dow Jones Newswires

May 15, 2012 23:40 ET (03:40 GMT)
*DJ BHP Chairman: Will Redirect Capital If Any Product, Geography Doesn’t Suit

(MORE TO FOLLOW) Dow Jones Newswires
May 15, 2012 23:44 ET (03:44 GMT)
DJ BHP Chairman Says Commodity Price Tailwind To Ease Further

SYDNEY (Dow Jones)–The tailwind of high commodity prices, which have helped the mining
sector report record growth in recent years, is moderating and is expected to ease
further, the chairman of BHP Billiton Ltd. (BHP) said Wednesday.
The sector also faces continuing global volatility and uncertainty since the global
financial crisis, which has led shareholders to lose confidence and focus more on cash
returns and dividend yields, Jacques Nasser said at a business lunch in Sydney.
“Rather than the world settling down, we will face increasing volatility and
uncertainty,” he said. “It is really going to feel as if the ground is shifting
under our feet.”
Nasser described the 2008 crisis as a structural shift and said ongoing developments in
the eurozone were a short time ago “almost unthinkable.”

-By Rhiannon Hoyle, Dow Jones Newswires; 61-2-8272-4625

(END) Dow Jones Newswires
May 15, 2012 23:49 ET (03:49 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.

Posted by Roger Montgomery, Value.ableauthor, SkaffoldChairman and Fund Manager, 16 May 2012.

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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.