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FMG and Iron Ore Play...

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FMG is overpriced?

You bet. In fact most iron ore plays by now are beginning to smell stale and it's about time to get off the train. But how many are actually seeing the early alert? Doubt if there's any. In every party, there are always people who would stay to the end and ended up switching off the light. The last one to go usually has this "honour". This time around, there shouldn't be any difference.

The party will not end just like that though... it will drag on for a while. The smaller, more speculative mines will be the ones making big $$$ for the speculators first (like now) but they are the fly traps that will eventually end up killing the most flies - small flies that couldn't resist staying on after getting their fill of the bait... many small speculators will get their hands burned this time by the small mines, which are basically a plot of land in the wild with a lot of dirt and a lot of hot air. And the vendors? They would tell you they have received many calls from China so they can pass off the deal with potential Chinese interest. Haha... there's a Chinese gold rush on going if you are not aware!

The bigger flies? They will die in the hand in the likes of FMG, which basically doesn't have a lot of substance - an empty vessel if you like - 3 quarters of air and the rest is dirt with iron ore and a lot of debt. Eventually, Tricky Twiggy will be selling his share to the Chinese to pay off his debt, and losing the whole plot in the process. The Chinese simply do not trust him, as they see him to be a very good operator but a cunning one. They don't see a lot of "honour" in him, esp his words. They don't like to do biz with people who don't honour and twist their words.

To the Chinese, your words and hand shake matter more than a piece of paper contract. Much much more. That's why they are furious with RIO, and the local Chinese experts and media brains in Australia, have no idea of what's important and what's not... to the Chinese. It's a perspective thing. But at the end, there's always a price to pay for everything. Just remember that.

So how will the iron ore script plays out?

Watch the next two quarters first. Keep an eye on RIO's sales vs BHP's sales vs Vale's sales vs Chinese+Japanese demand. And if you like the thrill, check FMG's sales against the big three and feel the chill why someone would want to pay so much for FMG?

By 2015 or earlier, when the new Chinese iron ore find comes into production (and it will be and will be very low cost), it will become obvious to many then why RIO's and BHP's iron ore assets do not worth what you are paying them now. In addition try consider one important factor that help pushed the iron ore price to last year's high - BHP's hand in buying up all shippers from S.America to Asia to press for the last 15%.

The Chinese are trying hard to reverse that but they are still disorganised at this stage, hence they are unable to bargain more effectively. But they will regroup - if there were to be a next round of negotiation - it won't be this easy for BHP and RIO. If the Chinese can't get what they want this round, they will get it in the next round. It's just a matter of time, or a matter of how the cycle turns.

The rust is setting in, but then 2015 is still a long way to go... do you care? Do I care?

Nah... unless you are the long term buy and hold type.

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  1. haunting's Avatar
    Here is a telling tale...
  2. kennas's Avatar
    While there's going to be a medium term blip in the market and oversupply/stockpile of IO, in 10 years time the tables will be turned once again and the demand from Chindia with xxxxx million peasants moving to cities and buying cars will probably mean there's not enough IO on the planet to appease them. Short term, I agree, longer term (not that much really) commodities will be even hotter. 2c
  3. haunting's Avatar
    I hope you are right...Here is a report to support your view.

    For long term IO play, larger IO export volume may be. Higher price? Don't think so... at least not in the next few years. Unless inflation/hyper-inflation kicks in much earlier than I thought. But then I have a suspicion China will not be paying US$ for our IO. It would be some other currency and possibly RMB.
  4. haunting's Avatar
    Nigel No Friend... from FNArena

    Whenever FMG popped up as a topic in the media, I would almost never failed to think of this quote from Ab.Lincoln...

    You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.

    Such negative reaction! ... gotta say there's a cognitive bias in me somewhere when come to this Nigel.
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