Has Iron Ore Gone Crazy?

Iron ore prices remained not all that far from multiyear lows Monday morning, but iron ore miner stocks rose sharply after officials told attendees at China’s National People’s Congress over the weekend that the government would permit a large, even record, deficit and a higher money supply to ensure economic growth of 6.5% to 7.0% for the year. Because China drives demand for steel, the reports have been a strong positive for iron ore miners.

Cliffs Natural Resources Inc. (NYSE: CLF) saw its stock price rise more than 6% on Friday and pop nearly 30% again Monday morning before settling back. Rio Tinto PLC (NYSE: RIO) and BHP Billiton Ltd. (NYSE: BHP) both added around 4% in Australian trading and have gained about 3.5% and 2.5%, respectively, in New York Monday morning. Australia-traded Fortescue added 24% Monday, and Brazil’s Vale S.A. (NYSE: VALE) added a whopping 62% over the past five trading days by Monday morning.

Also in the past five days, iron ore prices have risen from just under $49 per metric ton to nearly $53 at Friday’s closing. That 8% gain has been magnified by last week’s imposition of a 266% tariff on Chinese cold-rolled steel imported into the U.S. Steel imported from Brazil, India, Japan, Korea, Russia and the United Kingdom will also be affected by smaller duties. Our recent look at the steel market and steel stocks was not encouraging.

Some of the gains are also undoubtedly short covering. Short sellers were probably surprised by last week’s sudden upturn in iron ore prices and the bump to iron ore miner stocks.
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The jump in both futures price and miners’ stock prices will only last if China keeps its promise to boost the country’s economy at any cost. That seems unlikely, unless the government plans to build more high-rise housing that will sit empty because demand has dried up. At best any recovery in the real estate market is likely to be short-lived and the current commodity and stock price rally will dissipate.

Cliffs traded at $3.44 in the first hour of Monday trading, up 20% for the day, in a 52-week range of $1.20 to $6.87. According to MarketBeat, the stock currently has seven Sell and three Hold ratings and a consensus price target of $2.20.

Vale traded up about 7.5%, at $4.71 in a 52-week range of $2.13 to $9.14. Recent analyst moves are more or less evenly split: HSBC maintained a Hold rating and boosted its price target from $2.20 to $2.80, Nomura has a Buy rating but lowered its price target from $5 to $3.50 and HSBC downgraded the stock from Buy to Hold.