Iron Ore Prices Fall Over 50 Per cent

In mid-July iron ore was $228 but then China announced it was cutting steel output and by 22 September iron ore fell by more than 50 per cent to be trading just under $100. Over the same period, Australia’s big miners fell away with BHP and RIO down around 30 per cent, while FMG is down over 40 per cent. Given this, many investors are asking whether they should be buying the big miners right now. 

Is this the time to invest in BHP, RIO and FMG?

Investors like to chase a bargain and when a good stock has fallen heavily, it can present an opportunity to enter while it is undervalued. That said, investors tend to buy too early only to find they have caught a falling knife, as they watch the price of the stock continue to fall. Given that BHP, RIO and FMG are all effected by the iron ore price, the first question investors need to ask is whether the price of iron ore has stopped falling, which I don’t believe is the case.

The second question investors need to ask is whether the price of the stock has also stopped falling. Unfortunately, many investors get this wrong because they look at how far price has fallen compared to a few weeks or months ago to determine if the stock is a bargain.

Take RIO, for example, it was $137 at the end of July and last week it had fallen to $94, and as investors started buying into the stock believing it was cheap, it pushed the price up to around $100. So, has RIO stopped falling? Maybe, but we can’t confirm that just yet.

We are also yet to confirm if iron ore has stopped falling, as it is possible it could fall another 20 per cent in the coming weeks and/or months, which is likely to impact the share price of BHP, RIO and FMG further. That said, I believe we have already seen the price of these stocks fall 80 to 90 per cent of what the total impact will end up being.

Given this, while investors should start to get excited about the impending opportunity, it is still way too early to be buying these stocks. The time to take advantage of these lower prices will most likely be in November but this will only be confirmed when we know they have stopped falling.

What were the best and worst performing sectors last week?

The best performing sectors included Energy up 5.05 percent followed by Utilities up 0.95 per cent and Consumer Staples down 0.26 per cent. The worst performing sectors included Information Technology down 6.22 per cent followed by Healthcare down 5.83 per cent and Materials down 2.65 per cent.

The best performers in the ASX/S&P top 100 stocks included Orica up 17.50 per cent after brokers updated their target expectations for this stock. This is followed by a2 Milk up 9.44 per cent and Woodside Petroleum up 7.13 per cent. The worst performing stocks included NextDc down 12.74 per cent followed by Afterpay down 10.06 per cent and Mineral Resources down 10.04 per cent.

What's next for the Australian share market?

Once again, the Australian stock market exhibited indecision given that it rose early in the week before falling away only to rise again before falling away on Friday. What is important is that last week the All Ordinaries Index traded lower than the prior week and to its lowest level in the last 84 trading days indicating the market is weak.

While this is a sign that we can expect more downside, don’t get too alarmed as the low last week means the All Ordinaries Index has already fallen nearly 6 per cent since the all-time high on 13 August.

While we are in the timeframe for the low to occur, I don’t believe the All Ordinaries Index has fallen enough in price as I expect the fall to be in the vicinity of 8 to 12 percent with the low expected to occur anytime between now and mid-October or possibly a little later with my target below 7,200 points.

Many stocks are looking quite attractive right now although I urge investors to exercise caution in the short term until we have confirmation that the market has turned. Those who are patient will be rewarded as they are many good buying opportunities likely to appear in November.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.