FYI | Jun 21 2006
So the Chinese steel mills have finally accepted the 19% price increase for this year’s iron ore supplied by the three leading global producers (until March 2007).
BHP Billiton (BHP), the quietest of the three during the past few weeks, was the first to announce the news to the London stock market and on its website overnight.
As I am writing this week’s editorial news flashes about Baosteel finally accepting the proposed price increase on behalf of all the major Chinese steel producers have started to leave China. It is final, this year’s iron ore saga has finally come to an end.
I bet you next year will be different.
As we wrote in a larger feature story on the matter last week, this year’s defeat is bound to leave a mark on the Chinese psyche. There will be a lot soul searching in Shanghai and Beijing between now and early next year. The Chinese will make sure they will learn from this experience. Next year they may represent 50% if not more of global iron ore consumption.
Last year they had to accept a gigantic 71.5% price hike – an event never seen before in modern history. This year would be different as the world would meet true Chinese mercantilism and negotiating power. Alas, for the Chinese, there were still a few lessons to be learnt – the hard way.
A spokesperson for Brazil’s Companhia Vale do Rio Doce pointed at, one key error the Chinese negotiators allowed to slip in this year: they were in no rush to come to an agreement. No doubt, they were hoping this would ultimately swing the pendulum into their favour.
The Chinese are now well aware of the difference between a buyers’ and a sellers’ market. No matter what hardball tactics they will throw in next year, if the market remains as tight as it is right now, they are likely to find it a hard target to achieve a price decrease next time.
The other grand theme that has kept investors, market commentators and investment strategists occupied over the past few weeks was: aha, we have a correction, finally, but how long is it going to last?
The FN Arena Bear/Bull Indicator is still indicating the local share market has to live through some more nervous jitters in the short term before a confident rebound can once again become a fact.
AMP’s Head of Investment Strategy & Chief Economist, Shane Oliver made a few interesting comments about the matter recently, I thought I’d share them with you this week.
The key difference between a bear market starting and a bull market continuing is that under the second scenario share prices should bounce and climb higher within six months or so, Oliver argues. He has history on his side.
AMP analysis has shown the Australian share market has suffered corrections of circa 10% in each year from1996 to 2001. Each time shares bounced back within six months, each time the total year generated a positive return.
The chances that each correction heralds the start of a bear market are actually quite small, Oliver argues. Since 1989 (that’s 17 years) only three times did a share market correction end up in a bear market: August 1989-January 1991; February 1994 – February 1995 and March 2002 – March 2003.
All this leads Oliver to the conclusion that the current correction is likely to be just another retreat in an ongoing bull market. In fact, says Oliver, the historical record indicates that 10% to 20% corrections are not unusual. He believes they should be regarded as healthy because they ensure share markets don’t get too far ahead of themselves.
To add to the argument, Oliver says shares are now cheap (mind the nuance: not fair value, or closer to fair value, but cheap) – a fact that would certainly be supported by the extreme level of Buy recommendations in today’s market.
Having said that, he also believes a recovery won’t happen tomorrow. The market needs time to regain confidence and for that to happen interest rate and economic growth fears will have to fade first, he says.
Interestingly, Oliver also points out that the tail end of a US interest rate tightening cycle often goes hand in hand with a financial crisis. These crises, like the Asian meltdown in 1997 and the tech crumble in 2000, usually mark the low point in the correction, but they also add to increased volatility.
Oliver agrees with other experts the risks are now higher for things to turn worse than they have been at any point over the last few years. That’s because any further increase in US interest rates beyond 5% will take them into restrictive territory. On top of this, interest rates are rising all around the globe.
His final argument is the well known: sell in May and come back in October.
I guess the main message to investors is: patience required.
Till next week,
Your very patient editor,
Rudi Filapek-Vandyck
(Supported by the ultra patient Fabulous Four: Greg, Chris, Terry and Rob)