It was a blast for shareholders in Vale SA (ADR) (VALE) while it lasted. VALE stock had a nice, short run on a sudden surge in prices for iron ore, but now it’s over.
Analysts at Stifel downgraded Vale stock Thursday to “hold” from “buy” because traders have already had their fun. VALE more than doubled from its Jan. 25 low on a 60% rise in iron ore prices, said the analysts.
The price spike in iron ore came after China said it would authorize more deficit spending to fuel economic growth.
Too bad the higher prices can’t last, Stifel says. From the note to clients:
“[A]t today’s price, only 9% of global iron ore miners are losing money, vs. about 25% of producers at the December low of $37.00/tonne. This implies nearly 100 million tonnes of excess capacity is still profitable. For this reason, we expect to see a reversal of the latest price spike in order to force supply discipline.”
Analysts at Goldman Sachs concurred with the temporary nature of the rally in iron ore prices, noting that seasonality is what’s driving demand.
As GS said:
“The rally in iron ore prices was the result of a surge in steel prices needed to widen mill margins in order to incentivize operators to pay the restart costs and rebuild operating inventories of raw materials as China enters this year’s peak construction season.”
Commerzbank analysts also chimed in, noting that supplies of iron ore are more than adequate:
“We believe the pronounced and sudden price rise to be exaggerated given that there will be no change to the ample supply situation on the seaborne iron-ore market.”
VALE Stock Mines the Pain
Investors can expect more surges in mining stocks every time there’s a hint of optimism in commodities, but it’s still too soon to try to catch a falling knife.
Supply and demand are out of whack now that China is experiencing slower economic growth, and the rebalancing process just isn’t happening.
Commerzbank says exports of iron ore from Australia should increase by 13% this year to 868 tons on the seaborne market. Brazil is set to hike exports by more than 7%.
That’s a lot more supply for the increase in demand. China’s iron-ore imports will grow by 2.3%, analysts said.
VALE has been in a downtrend for almost two years and it’s going to take substantial macroeconomic changes to swing that around. China isn’t helping and things are bad enough in the European Union that the central bank cut already-negative rates.
The high volume and volatility of Vale stock makes it ideal to trade. But if you’re trying to market-time commodities markets, cut it out.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
