When falling prices don't matter

Investors don't expect price drops in iron ore to last long.

By Jim J. Jubak Sep 2, 2010 4:41PM

Jim JubakIt's hard to imagine this happening with any other "product": The price drops 12% for the next quarter, and the stock market essentially shrugs it off.  


On a bad day for the market, Aug. 30, when the Standard & Poor's 500 stock index dropped by 1.47%, the shares of the world's biggest producer of this product fell by 1.29%.  


And on a good day for the market, Sept. 1, when the S&P 500 jumped by 3%, shares of the largest producer rocketed upward by 5.5% and shares of number two went up 6.1%. 


I guess when it comes to iron ore -- and that's the "product" in question -- investors just don't expect any price drop to last for very long.

 

Even after the drop, iron ore prices would be 120% higher than they were a year ago. So, this disappointment would leave these miners still incredibly profitable. 


Iron ore prices, which used to be set by annual contract negotiations, are now set quarterly by reference to the price of iron ore on the spot market. The new quarterly price set on September 1st dropped by 12% to $128.50 to $130.00 a metric ton, from $145.00 to $147.50 in the current quarter. 


The old investing adage -- acorns don't grow to the sky -- seems apt here. After more than doubling in a year, it's only reasonable to expect prices to pull back a bit. The cause of the price drop is a temporary glut in steel that is reducing demand for both iron ore and coking coal. 


But judging from the very modest decline (first) and then the huge rally (second) in the shares of BHP Billiton (BHP), the world's largest iron ore producer, and Vale (VALE), the world's second largest producer, no one expects that steel glut or the decline in iron ore prices to last for very long. 


Frankly, I'd use any weakness in the sector in the next quarter on this price decline to pick up shares of iron ore and metallurgical coal miners. I mentioned three coal producers in my post that would deserve a look in that scenario. (And it doesn't hurt that they're all potential acquisition candidates too.) 


At the time of this writing, Jim Jubak didn't own shares of any company mentioned in this post in his personal portfolio.     
 
 

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
274
274 rated 2
447
447 rated 3
698
698 rated 4
633
633 rated 5
652
652 rated 6
650
650 rated 7
491
491 rated 8
268
268 rated 9
125
125 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.