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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Having been calling for a marginally weaker open this morning, the ASX 200 has come under heavy selling pressure this afternoon courtesy of a barrage of negative headlines espousing the end of the mining boom. This thematic has been in place ever since BHP announced the deferral of its Olympic Dam expansion a few weeks ago and has reached fever pitch today with notorious “commodity markets/China bull”, Fortescue Metals, canning its ambitious expansion plans and laying off workers.

Through all the dark days of the European debt crisis, and the questions over China’s growth trajectory, Fortescue has been one of the market’s ‘beacons of hope’, continually defying the naysayers and achieving the unachievable. 155 million tonnes per annum of iron ore production by mid-2013 was the highly publicised target. Those ambitions are no longer. The iron ore price has collapsed below $90 per tonne and the highly leveraged Fortescue has gone into lockdown mode, flogging assets and shedding staff in order to rein in costs and minimise the damage of slumping revenue inflows. The stock has been down as much as 10% today and is the story of the day. Rio Tinto and BHP are both lower by more than 2.2%, with the materials sector being the biggest loser of the session.

The big questions now are can prices rebound, and how soon? BHP CEO Marius Kloppers seems to think so, as does Fortescue boss Nev Power, and in the not too distant future. Supply/ demand fundamentals support this as well, with much of the industry now uneconomic at these levels.

While macros issues such as ECB and Fed easing will continue to dictate the fortunes of global markets, unfortunately for us here in Australia, a sustainable rally isn’t possible without a serious contribution from the miners. It’s hard to see that occurring at the moment, with sentiment towards the sector in the doldrums due to falling commodity prices and shelved project expansions. That can change quickly though – it always does.


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