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Quarter-End Insights

Basic Materials: Iron Prices Swoon on Weaker China--Copper Is Next

The Chinese fixed-asset problem plaguing iron ore and soon copper will not be solved by cutting interest rates.

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  • Despite a recent rise in global equities, the basic materials sector continues to trade slightly below our fair value at a median price/fair value of 0.96 compared with a market price/fair value of 1.04.
  • Iron ore prices dropped off a cliff in 2014, and we don't expect a return to heady prices anytime soon.
  • Copper prices have held up relatively well, but we think Dr. Copper will be the next shoe to drop from China's inevitable slowdown in fixed-asset investment.
  • Markets cheered China's interest-rate cut as effective medicine for the country's slowing economy, and thus good news for commodities. We see this as nothing but a short-term fix--a shot of whiskey to cure a hangover.

 

Jeffrey Stafford does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.