Remember last year when nickel was trading over US$24/lb and was ostensibly heading for US$50/lb, by June 2007 it was at US$20/lb and now (June 2008) it is around US$10/lb. The LME relaxed its holding conditions for nickel at its warehouses twice, China stated (in a conference in Shanghai) that it expected stainless steel demand to reduce, and nickel pig-iron was going to be used in significant amounts. The fact that stainless steel demand did not reduce and environmental restrictions were placed on the use of nickel pig-iron is beside the point – the damage was done and the nickel price tumbled.

Uranium was apparently in a major shortage, with a huge supply-demand gap, but when Paladin took over Summit for just over A$1bn mainly to acquire the remaining 50% of the Valhalla orebody in Queensland that it does not own, and may or may not be able to mine, that appeared to be the peak for uranium stocks. Paladin was then about A$10.50 per share.

Therein lies the problem with bubbles, when you are inside them it appears to be virtually impossible to predict when they are going to burst (or end), but afterwards it seems to be so obvious.

And so to iron ore.

So far any comments along the lines of iron ore prices at some stage falling have fallen on deaf ears as shown in Figure 1 of the iron ore contract fines prices as presented by RIO at a recent conference on 3 June 2008. Even China stating that it intended to increase warehousing charges from 1 June 2008 for iron ore stored at ports to get importers to clear their stocks, so far appears to have had little impact.

China’s move to increasing charges reputedly stems from traders importing >15% more ore to 153mt for January to April 2008 (apparently well above demand) resulting in about 80mt in port warehouses (with a number of warehouses near full storage) by 15 May, while refusing to deliver the ore thus squeezing smelters and driving prices higher.

With Fortescue reputedly ramping up from 50mtpa to 200mtpa, BHPB increasing, RIO increasing, the whole mid-west of WA at some stage going into production, plus South Australia, and the mega deposits coming into production in other parts of the world, it all has to go somewhere. It has been stated that China is securing stakes and funding companies to go into production, however, it has to be recognised that once everything is in production (at huge funding cost) if there is then oversupply, the selling price has to fall.

At the China Mining Conference in November 2007 in Beijing, Sinosteel stated that they thought iron ore imports would level out at ~465mtpa in 2009 or only ~65mtpa higher than 2007 levels. However that did assume China’s domestic iron ore production would increase by 140mtpa to just over 500mtpa by 2010.

When iron ore juniors have target iron ore resources before they have even drilled a hole, there appears to be a loophole in JORC probably because the resource currently does not exist and no drilling has taken place.

There have been a number of recent comparisons of iron ore or coal replacing or becoming the new “gold” – which is an interesting concept. After a fire the pile of gold is still there, but a pile of coal becomes ash, and as for iron ore – well you can pick up a gold bar, but as for the equivalent value in iron ore. As for coal jewellery – enough said.

However, proceeding with the gold comparison, can you imagine crediting a junior gold company for having a dream mineable resource of so many mt at 1oz/t or 30g/t or more before drilling the area (known to contain gold).

No, well when investors credit iron ore juniors for their target resources (before drilling) surely that has to be close to a market top. But perhaps not, as we have observed, it is difficult to spot the top when you are inside a bubble.

Disclosure and Disclaimer: This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, may hold interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

Figure 1. Iron Ore Fines Contract Price Estimates (Source : RIO 3 June 2008 Presentation)