Iron ore prices retreat by 12% and iron ore mining stocks say, So what?, and move higher

It’s hard to imagine this happening with any other “product.”

The price of the product drops 12% for the next quarter.

And the stock market essentially shrugs it off. On a bad day for the market, August 30, when the Standard & Poor’s 500 stock index drops by 1.47%, the shares of the world’s biggest producer of this product fall by 1.29%. Shares of the second largest producer fall by 2.49%, it’s true, but that’s not unexpected since the beta of that stock (the measure of the stock’s volatility in comparison to the entire stock market) says that these shares are on average two-thirds more volatile that the stock market as a whole. (The drop in the shares is almost exactly what beta projects.)

And on a good day for the market, September 1, when the S&P 500 jumps by 3%, shares of the largest producer rocket upward by 5.5% and shares of No. 2 go up 6.1%

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 be120% higher than they were a year ago. So this disappointment would leave these miners still incredibly profitable.

Update BHP Billiton

 On January 20 BHP Billiton (BHP) announced that second-quarter iron ore output rose 11% to a new record on heavy demand from China. The company also reported increased production of petroleum, zinc, diamonds, and nickel. Production of coking coal, uranium, and copper declined.

 Continuing the shift in how prices are set on the global iron ore market, BHP Billiton said that 46% of its iron ore shipments from Western Australia were sold at market rates.

Update BHP Billiton (BHP)

When I added BHP Billiton (BHP) to my Jubak Picks 50 portfolio in my book The Jubak Picks I said that the company was a one-buy way to get exposure to a wide spectrum of commodities.

In the first half of 2009 that diversification paid off big, the company reported on August 12. The company’s iron ore business reported an operating profit of $6.2 billion; the base metals (copper, lead, zinc, and such) division reported $4.6 billion in operating profits; and the oil business reported $4 billion in operating profits.

That diversification didn’t prevent company’s revenue from falling (by 16% from the first half of 2008) or pre-tax profits from plunging by 67% from the first half of 2008.

 But it did provide enough stability so that the company was able to maintain its dividend payout of 41 cents a year for the six month period.  Competitors Xstrata (LSE: XTA.L) and Anglo American (OTC: AUKY.PK) have both suspended their dividends.

Trading halted in Fortescue Metals: more cash from China on the way?

Trading in Australian iron ore miner (and Jubak’s Pick) Fortescue Metal (FSUMF.PK) has been halted in anticipation of the release of news on Monday that the company has completed a  ”commercial negotiation”.

Speculation in Australia is that the news will be that China’s sovereign wealth fund, China Investment Corp. (CIC), has decided to invest $1 billion into Fortescue. CIC, rumors go, will get convertible bonds in exchange for its cash.

The new money would go a long way toward funding Fortescue’s goal of expanding producton to an annual 95 million metric tons by sometime in 2012. Production is now running at a rate of about 35 million tons a year.

China plays hardball on iron ore but the iron ore miners are the winners so far

China has so far refused to sign a long term contract with the world’s big iron ore exporters, Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RTP). The goal was to get a big price break on iron ore prices. But it now looks like China’s tough stance has backfired. Chinese companies are now either buying iron ore on the spot market at prices about 50% higher than those in the annual contracts signed by Korean and Japanese steelmakers back in April,or scrambling to sign side deals at the price set by Korean and Japanese buyers.

The result is that spot iron ore prices are booming. The big three iron ore exporters are getting higher prices for their ore than they forecast just a few months ago. And Chinese steelmakers are announcing huge price increases for their products just as China tries to revive its economy with a big shot of spending on iron and steel-intensive infrastructure.