Gordon Johnson: An Imminent End To An Epic Restock Suggests Iron Ore Prices May 'Snap' Back Toward Fundamentals

Iron ore investors should be prepared for a flood of new supply to come online in the next several years. According to a new report, Axiom analyst Gordon Johnson, excess seaborne supply of iron ore will jump from an estimated 37Mt in 2016 to 269Mt by 2020.

Axiom has sorted through public filings of more than three dozen companies and to compile its estimates.

“Our work suggests ~70 percent of global iron ore demand can be met at a cash cost of <$23/t; add in $8/t for interest, CAPEX, & other, & we get to a breakeven of $31,” Johnson explained.

Iron ore prices are currently up 77.4 percent from a year ago and now stand at around $91.30/t. Johnson believes fundamentals suggest they should be around $40/t. Considering Chinese real estate investment has been softening, he views any prices above $62/t as “a stretch.”

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Johnson argues that the Chinese steel mill restocking cycle, the largest in more than six years, has contributed to the rapid rise in iron ore prices. In addition, traders have build up port stocks to a record high. Axiom believes steel inventory is peaking, however, and iron ore prices will soon once again reflect underlying market fundamentals.

Axiom projects iron ore prices of $60/t in 2017 and $40/t in 2018.

Sell

The firm has Sell ratings on the following U.S.-listed stocks:

• Caterpillar Inc. CAT.
• Cliffs Natural Resources Inc CLF.
• GATX Corporation GATX.
• Joy Global Inc. JOY.
• Rio Tinto plc (ADR) RIO.
• Trinity Industries Inc TRN.
• United Rentals, Inc. URI.
• United States Steel Corporation X.