For the Nimblest Traders Only

 | Sep 26, 2013 | 5:37 PM EDT
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BHP Billiton (BHP), the world's biggest mining company, is worried that rising supply will depress commodity prices in the short term, company chairman Jac Nasser said on Sept. 23.

No commodity looks likely to face bigger short-term pressure than iron ore. Fourth-quarter production from the three big Australian iron-ore miners -- BHP Billiton, Rio Tinto (RIO), and Fortescue Metals Group (FSUGY) -- will be 34 million metric tons higher than in the fourth quarter of 2012, according to Citigroup. That's just the beginning of a huge surge in supply. Australia alone is projected to add 140 million metric tons of new capacity over the next two years.

With India expected to end a ban on iron ore exports, which will itself add to supply, and with Chinese steel production likely to remain in a range of 760 million to 800 million tons, slightly below the 800 million ton peak hit in the 12 months ended May 2013, it's hard to see how that extra capacity won't push iron ore prices lower over the next two years or so.

But that trend hasn't prevented a heated Wall Street debate on the iron-ore prices in the very short term (say, the fourth quarter). Citigroup, for example, is looking for prices to fall to $110 in the fourth quarter from the current $133 a ton. Macquarie Securities, on the other hand, is looking for prices to climb to $150-160 a ton in the fourth quarter. Mining companies are less divided. Fortescue Metals is projecting $110-130. Brazil's Vale (VALE) says $120-130.

The difference in projections isn't about a difference in views on long-term supply and demand imbalances. The iron-ore bulls are counting on seasonal, weather-related supply problems in Australia to cut into supply and on Chinese steelmakers to restock inventories in the fourth quarter. The iron ore bears expect to see demand from China fall in the fourth quarter as Chinese steelmakers run down ore stocks and as tighter monetary policy in China cuts into growth in that economy and demand for steel.

In the long term, I think economic growth in developing economies will drive global demand for steel higher. Once the current burst of additional supply is over, iron-ore prices should start to climb again. In two or three years, you'll want to own shares of iron-ore miners such as Vale. But in the short term, I think only the nimblest traders, those that can catch the short-term moves and turns in the price of iron ore, will be able to make any money in these shares.

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