There is a general consensus that additional supply will come on as this year progresses. The additional tonnage from Rio, Fortescue and BHP has been well documented. And this will continue through 2014. But will China slam the brakes on liquidity as it did last year? The jury is still out and there are many that are anticipating a softer landing. At this stage Chinese steel mills and steel traders are still restocking.
Merrill Lynch this week provided one of the more bullish outlooks. ''We raise our 2013 iron ore price forecast by 9 per cent to $US131 as we incorporate higher realised prices in [the first half of 2013] and raise our [second half].''
Meanwhile, the sharemarket has already cast a vote. Pure-play iron ore producers like Fortescue and Atlas Iron have experienced huge share price gains over the past six weeks. Diversified miners including Rio and BHP have also felt a positive change in sentiment.
In part these stocks were oversold earlier in the year and the revival represents some compensation. The earnings uplift all these companies could experience (if the current iron ore spot price remains) is substantial.
Running these prices through the Rio model for 2014 would result in a 15 per cent improvement in calendar year earnings. Fortescue's profit would be up about 50 per cent in fiscal 2014, while Atlas would receive an earnings boost of as much as 100 per cent. But while some commodity analysts have been revising iron ore pricing the equities analysts that cover iron ore stocks have not dipped their toes into their models.
To the extent new iron ore prices are factored into corporate earnings it won't (typically) happen until the end of the September quarter.
We should start seeing upgrades in CLF next. Most of these firms are trying to get their short clients out before they upgrade them. My guess is we will see upgrades starting next week when the volume starts to pick up.
Talking about additional supplies of iron ore sounds like Cliff's is trying to diversify away from iron ore and coal only. The only project I know of that is expanding CLF's iron ore is the Bloom Lake project. But Cliff's also has project a project in South America that is focusing mainly on copper and gold, the Decar Nickel project, and the Ring of Fire project. To only give Cliff's a 5 multiple for forward earnings growth is beyond reason. CS needs new analysts.