Friday, December 23, 2011

Beware the Iron Ore Bubble (RIO; BHP; VALE)

From CNBC's NetNet:
Beware of the Other China Bubbles 
The deflation of the great Chinese property bubble will not directly hurt most US investors, but there are other bubbles linked to Chinese property that could.

The report in Thursday's Wall Street Journal makes it clear that the Chinese property bubble has popped. But the story doesn't end there. 

China accounts for almost half of the global demand for steel, and at least half of that goes into construction. If the deflation of the Chinese property bubble leads to a slowdown in property development—as it almost surely will—global demand for steel could slow dramatically. That means that companies making big investments in steel production or iron ore mining could find that they've over-invested. 

Another story in today's Wall Street Journal paints a picture of what over-investment in iron ore mining looks like:
The largest iron-ore mine in Australia will take a leap in efficiency starting next April: 10 automated trucks, one remote driver.
With demand from China and other steel-hungry industrializing economies rising, the massive trucks—programmed to haul ore and waste around the pit using the global positioning system—are part of a push by Rio Tinto [RIO  49.35    -0.20  (-0.4%)   ] PLC to to adopt automated technology to cut costs and ramp up production even in the face of a labor shortage.
This kind of thing doesn't come cheap. Rio Tinto plans to invest almost $15 billion to expand annual iron-ore output in Australia....MORE