"The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam." George Soros, legendary macro investor, January 2014.
Knowing your strengths and weaknesses is essential for investing, and since I'm focussed on analysing individual businesses, I tend to get my technical and macroeconomic analysis from experts. I make no secret of the fact that it was Soros that convinced me that China's construction boom was coming to and end.
Shareholders in Arrium Ltd (ASX: ARI), Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) are all feeling the pain, but others may be wondering if this is the perfect time to buy.
I don't think it is.
I've got no horse in this race. I've never taken a position on any of these companies, long or short, and I truly appreciate the need for iron ore as developing nations industrialise. I'm sure China will continue to import the stuff for years…
However, in the first eight months of 2014 Chinese crude steel consumption actually diminished. Indeed, iron ore supply exceeded demand in China by 81 million tonnes from January to August.
According to Reuters, Wang Xiaoqi, the vice chairman of the China Iron and Steel Association told a conference that consumption had fallen due to "the economy slowing and the economy undergoing restructuring."
It's my opinion that Chinese economic growth will soon begin to look more like that found in developed consumer societies. I expect China will experience growing demand for consumer goods and services, but I think demand for commodities such as iron ore and coal will either grow more slowly, or possibly even contract a little (if only for the short term).
I've got no idea what miners' share prices will do over the long term, but I don't think Fortescue or Arrium are particularly undervalued, even after the falls. I might be wrong, but the worst case scenario is I miss out on gains (or make them elsewhere).
What I am (almost entirely) sure of is that the next few years are likely to be a bumpy ride for iron ore miners, and I don't want the stress of investing in them.
