Was having a casual listen back to the first episode of the new season (brought to you by https://opentrader.com.au/ - from $5 a trade use a superior platform) and there was a part that really caught my interest on the subject of China and iron ore and the quality.
Podcast link is here
I'll try and transcriptify Rob Rennie's words here :
"the 62% index is the benchmark index and that's essentially what everyone manages their supply to. But higher quality iron ore...the 65% iron ore price has really exploded as well because you want the volume, you want the higher quality as China tries to improve the quality of its steel and reduce the emissions you want higher quality."
Rob went on with something interesting about scrap steel.
"In April China released a 5 year plan which was focussed on improving the quality of its steel production so things like increasing the use of scrap steel...."
China only consumes 20% of scrap for production (the US is ~70%) and would need to ramp that up by building an industry around it. Rob mentions changing the furnaces used and...
"if you can do that over coming years you can reduce reliance on Australia."
(**note i've cut a few little words out i'm not a stenographer or dictographer or whatever they're called. You want the exact phrasing listen to the pod.)
Rob then went on to mention that China was cracking down on the speculation in the market on commodities prices being inflated from China.
Funny that this was recorded on May 20 and three days later the top commodities production leaders in China were read the riot act about the inflated prices and the Chinese National Development and Reform Commission has gone "full zero tolerance" on hoarding, false news and speculation. Prices have taken a slide so trading on the BIP Show Friday release would have paid divs. The warnings were there. They still are. They executed a CEO a few months for brinbery, corruption and *checks notes* bigamy (seriously) so if a state agency says "zero tolerance" then they're not there for the spiders. Policy direction is now direct action. Trade accordingly..
Interesting now to look at what opportunities exist out there in the scrap world. And yes ones that aren't Australian obviously. Japanese exports were set to get eh ball rolling as China moves from 20% to 50% scrap-made steel so do the homework there and have a look at what's neede to convert to electric arc furnaces too.
Further education for those keen to know more
The podcast went into some other parts on the commodities (super)cycle and the Trade That Paid if you want an easy ETF is COMM listed in London in GBP. Betashares used to have a good commodities ETF but they wound it up right before everything took off (rough timing guys). So this one from Blackrock will do nicely. It tracks the Bloomy Commodity Index so it's got your softs, industrials and precious and good amount of energy too. It uses swaps to gain exposure so it's not for everyone.
Buy on dips if it's in your risk profile.
Saw a high of 420 (you can see i'm averaged in at 385 and I'm happy that there's another leg or five to go upwards.
If you think Iron Ore is in a dip and you want to protect your downside then a FMG Bull Call Spread might be a way to go.
Borrowed the idea from a client who comes up with this sort of brilliant stuff. Wide spread but you get the idea. Downside is capped and the upside is acceptable in a week.
I mention "Copper" a bit too and I'm not really wordy when it comes to justifying it. Rob has some absolutely brilliant stats on how much more of the stuff we need. Direct exposure to that via the COPA ETF again in London.
Aside from that there's been a breakout in CNEW (that's the Chinese New Economy ETF by Van Eck) and it's being talked about. The move from speculating on Chinese glass futures getting shut down means money has to slide somewhere I guess. Why not there?
That's all for the Trade That Paid.
All the best,
James
James Whelan | Investment Manager
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