Legendary hedge fund manager Jim Chanos is betting iron ore miners are in for a steep slide. Putting his money where his mouth is, he is short miner Fortescue Metals Group.
Chanos is tipping the commodities super cycle will have difficulties as supply chases down demand, especially for iron ore and copper markets.
The supply that is due to come onto the market at the end of this year and next could be enough to crunch miners. If this is the case, BHP Billiton and Rio Tinto, who have increased mine capacity in a bid to ramp up production of the rusty red rock, might find themselves with problems.
Regardless of demand levels, Chanos thinks it is going to be a difficult market for the miners. The renaissance of domestic major iron ore miners such as BHP, Rio Tinto and Fortescue Metals might be short-lived.
Chanos is also betting cement and steel and construction machinery companies are in for a fall. In July, it was reported Chanos was short Caterpillar Inc on the basis of its exposure to mining. With an average holding period of only one year, Chanos’ comments suggest the slide is approaching.
Why would you take note of what Chanos has to say? He famously predicted the collapse of Enron after determining management were using accounting methods to overstate earnings.
For years Chanos has been shy on China. For now, he has drilled down to the micro-components of China’s economy and is looking for companies’ earnings profits in cash with linked transactions. If 2014 turns out how Chanos predicts, he will have been very early to the party — but there when it counts. It’s not timing the market; it is time in the market.
In the opposing corner to Chanos, we have Jim O’Neill who coined the BRIC acronym (Brazil, Russia, India, China). O’Neill is banking on China’s dominance into the future, estimating that China’s growth this year is the equivalent to 4 per cent growth in the US.
The future direction of commodities and related industries is one point both Chanos and O’Neill possibly agree on. Talking about a new and old China, O’Neill doesn’t think heavy industry and commodity-related companies are going to be experiencing gains.
It’s not all misery for China. Investment focus should be on consumption within China – what are people living there are spending their money on.