NERVOUS investors in Australia's third-biggest iron ore miner, Fortescue, got some welcome relief yesterday as shares in the miner jumped, helped by the rally in ore prices and hopes for more economic stimulus in China.
The benchmark price for a tonne of iron ore at the Chinese port of Tianjin climbed more than 5 per cent to $US100.20 overnight. The key commodity export has risen 14.8 per cent in four consecutive sessions, as investors piled back into the raw material after Chinese authorities confirmed that 1 trillion yuan ($A151 billion) in stimulus projects were under way.
The recent recovery in iron ore prices halted a plunge to October 2009-lows of $US86.70 last week on concerns China's growth was stalling too rapidly. The dollar also rose sharply on the iron ore rebound. The Aussie powered up to a three-week high of US104.91?, reinforcing perceptions it is closely tracked to sentiment on commodities.
Fortescue shares rose as much as 4.75 per cent, before ending the day up 10?, or 3 per cent, at $3.47. Other iron ore miners lifted, too. Atlas Iron gained 10?, or 6.8 per cent, to $1.565, Gindalbie Metals rose 2.5?, or 7.9 per cent, to 34? and Arrium ended 2?, or 3.5 per cent, higher at 59?.
Burrell Stockbroking senior adviser Jamie Elgar said Fortescue had been hit hard by short-sellers, who believed the company's balance sheet was under strain because of falling iron ore prices.
"Overseas investors have been shorting Fortescue and Atlas, particularly Fortescue, leading some people to think the company may need to raise some cash," Mr Elgar said.
But the respite did not prevent Standard & Poor's becoming the latest ratings agency to express a negative view on the miner's credit. Placing Fortescue on its negative creditwatch list, S&P said the recent sharp decline in commodity prices would probably see Fortescue generate lower-than-expected cash flows, which would pressure its liquidity as it tried to expand.
Fortescue requires iron ore prices of $US110 a tonne to remain able to pay its debts, industry sources say. Broadly the mining industry needs iron ore prices of about $US110 for projects to remain viable, although larger miners with less debt would be profitable at lower prices.
ANZ head of commodities research Mark Pervan said the iron ore market was experiencing a "short covering relief rally" after being "heavily oversold" by speculators in recent weeks.
Fortescue is among the most shorted stocks on the ASX 200, with 15.9 per cent of its stock being shorted, according to Bloomberg data.
Fortescue deferred plans recently to triple production to 155 million tonnes of ore a year, citing the weakening price for iron ore. Its announcement followed BHP Billiton's decision to shelve billions of dollars in investment at South Australia's Olympic Dam mine and the Outer Harbour project at Port Hedland in Western Australia.
"I think the plunge in the iron ore market was overdone," Mr Elgar said.
Frequently Asked Questions about this Article…
Why did Fortescue shares rally recently?
Fortescue shares rose after a rally in iron ore prices and hopes of more Chinese economic stimulus. The article notes miners benefited from a short-covering relief rally and Fortescue finished the day up about 3% at $3.47.
How did iron ore prices move and what drove the change?
The benchmark iron ore price at the Chinese port of Tianjin climbed more than 5% to about US$100.20 and rose roughly 14.8% over four sessions. The bounce followed confirmation that around 1 trillion yuan of Chinese stimulus projects were under way and a short-covering rally after the market had been heavily oversold.
What does Chinese stimulus mean for iron ore demand and miners?
Chinese stimulus spending on infrastructure tends to boost demand for iron ore. The article links confirmation of 1 trillion yuan in projects to renewed investor interest in raw materials, helping lift iron ore prices and providing some relief for iron ore miners.
Is Fortescue under financial pressure according to the article?
Yes. The piece says short-sellers have hit Fortescue amid concerns its balance sheet was under strain from falling prices. Standard & Poor's put the company on negative credit watch, warning that the recent commodity price slump could reduce cash flows and pressure liquidity as Fortescue tries to expand.
How much does iron ore need to sell for Fortescue and the industry to remain viable?
Industry sources in the article say Fortescue requires iron ore prices near US$110 a tonne to remain able to pay its debts. Broadly, many mining projects need about US$110 a tonne to stay viable, though larger, lower-debt miners can be profitable at lower prices.
What role did short selling play in recent price moves for Fortescue and the iron ore market?
Short selling contributed to volatility. Fortescue was among the most shorted stocks on the ASX 200, with about 15.9% of stock shorted per Bloomberg. The article describes the recent uptick as a 'short-covering relief rally' after speculators had heavily oversold the market.
Did Fortescue change its production plans because of weak prices?
Yes. Fortescue recently deferred plans to triple production to 155 million tonnes a year, citing weakening iron ore prices. The article also notes BHP Billiton shelved large investments at projects like Olympic Dam and Port Hedland amid the same price environment.
What signs should everyday investors monitor in the iron ore and miner stocks market?
Investors should watch iron ore price levels (the article highlights the importance of around US$110/tonne), Chinese policy and stimulus announcements, credit rating actions (such as S&P's negative credit watch), short interest levels, company production guidance or deferrals, and commodity-linked currency moves like the Australian dollar.
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