On January 21 2014, I finally got around to reminding readers about the slowing construction industry in China, and the impact that would likely have on iron ore prices. I suggested that "investors would be remiss to ignore the warning of legendary investor and speculator George Soros." I discussed a number of iron ore miners before concluding that "I don't want that kind of risk in my portfolio… If iron ore prices do take a dive in the next couple of years," I wrote, "it will be too late for investors in Fortescue, Arrium and Rio Tinto."
Since January 21, iron ore miners such as Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (AX: RIO) and Arrium Ltd (ASX: ARI) have fallen 16.3%, 9.16% and 36.03% respectively (and as I write this, they appear to be headed lower). Three Normura analysts seem to be getting the credit for calling the housing correction in China, "To us, it is no longer a question of 'if' but rather 'how severe' the property market correction will be," though in fact the bubble (and consequent need for a correction) has been common knowledge for quite some time.
Those who ignored the signs of slowing growth in China now know what it's like to hold an out of favour stock, and contrarian investors are probably getting interested in Arrium, which would appear to be quite cheap. It's fair to say that fear of a slowing construction industry in China has reared its head in the marketplace for iron or stocks. I still wouldn't go near heavily leveraged Arrium or Fortescue (its anyone's guess if or when they rebound). Rio Tinto has considerable more merit as an investment because it's low cost and diversified, but I don't think its worthy of my cash.
China is still using debt from "shadow banks" to fund apartments no-one can afford to live in, sometimes sold to people who live far away (and evidently have more money than sense). Absent yet another round of cheap debt, new apartment prices in China are coming down, and someone is not going to be paid.
If I had to hazard a guess, I'd say there will be or already are panic sellers for iron ore stocks, which is great news for my momentum traders with open shorts. Once again this goes to show that unless you're an experienced trader (I'm not), stocks with impending strong macro headwinds are a dangerous place to play. The smart money stocks I mentioned a fortnight ago have inched ahead, demonstrating that its more important that you don't lose money, than it is that you score a 10 bagger.
