MARKETS SPECTATOR: Big end iron blunder?

You'd have to have been hiding under a rock for the last two months if you hadn't seen or heard of the incredible rally that's bought iron ore back from the brink.

It's not only recovered, but it's gone well past where most "experts" were predicting it would rebound to. From lows around $85 per tonne in September 2012 to highs of $160 per tonne last week, it hasn't been for the faint-hearted.

Not surprisingly the major iron ore names have largely followed suit, especially the pure play miners like Fortescue Metals Group which is up a whopping 65 per cent.

However, the last week has seen a number of downgrades for the big diversified miners (BHP Billiton and Rio Tinto), citing recent share price strength and the unsustainability of current iron ore prices, which are now around the $155 per tonne mark.

Herein lies the question, and perhaps an opportunity. Have the big research houses got it right, which mean's we'll see a pullback in iron ore prices, or has the market got the better of them once again?

Currently, the average iron ore forecast for the first quarter of 2013 is $119 per tonne and $121 per tonne for the full year. As it stands, those estimates are looking very, very conservative. They're about 30 per cent below current spot prices.

Given the volatility witnessed in iron ore markets over the last six months, there's no doubting we could easily see a 30 per cent correction in very little time.

However, it wouldn't surprise me one bit if the "big end of town" has got this wrong once again.

Rather than trying to predict what will happen, let's look at what is actually happening. Right now, spot iron ore prices are sitting still or consolidating ever so slightly; I'm seeing no signs whatsoever of an increase in selling pressure.

Let's for a second assume iron ore prices stay where they are for the next month or so. That will bring us to Chinese New Year in early February, which will basically see everything in China grind to a halt for the best part of a week.

If this was to play out, then we'd see a large number of brokers upgrading the first quarter 2013 iron ore price forecasts. For example, if $150 per tonne was used, then we could easily see price forecasts for the big miners upgraded by more than 15 to 20 per cent. And that's just if prices sit still! Imagine what forecasts would look like if the unthinkable happened and iron ore kept on rising.

This is all occurring against a backdrop of accelerating Chinese GDP growth. I'm bullish about China-facing assets this year as all the short or underweight China money frantically tries to reposition itself.