By SIMON CONSTABLE If your portfolio is looking a little anemic these days, why not fortify it with some iron-ore stocks? They look set for a boost, but investors be warned: These stocks are volatile, so you may need a strong stomach.
The world's largest iron-ore miner, Brazil's Vale (ticker: VALE), and Cliffs Natural Resources (CLF), North America's largest, have taken a beating over the past few months, down 29% and 44% since the beginning of March as China's economy has slowed. That's the bad news.
The good news is that China's slowdown won't last forever. When it awakens, so will the sector.
Plus, both Cliffs and Vale have massive dividends, each over 5%. That means you'll be paid while you wait for the rebound.
China's previously fast-growing economy had been gobbling up iron-ore to meet the need for steel, which is vital for infrastructure projects. Steel is made from iron-ore and coal, with some scrapped steel added. But then this year, the giant Asian economy cooled off.
In the decade through 2011, China's steel production grew at an average rate of 16.5% a year, according to data from the World Steel Association. So far this year through September, it's up just 1.7%, to 542 million tons. But that sluggish rate is unlikely to continue.
China's Steelinfo says production for the full year could reach 679 million tons, down 0.7% from the 2011 total of 683 million tons, the first decline in three decades. Because China accounts for just shy of half of all steel production worldwide, that country's economic slowdown has sent the price of iron-ore tumbling, to $87 a ton in September, from a high of around $190 in 2011. It's now around $117.
"Iron-ore prices appeared to have troughed," says Leo Larkin, a New York-based equity metals analyst at S&P Capital IQ. The question now: When will we see the rebound? It could be soon.
"I think there is a developing theme that we should start to see improvements heading into to 2013," says Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund (PSPFX). "The expectations are that we will see further [government] initiatives in China to help stimulate growth."
Specifically, that would likely be loose monetary policy and spending on infrastructure. If that results in more construction, then China will start eating more iron-ore. Hicks also notes an interesting "tell." Watch the Shanghai Composite index, which tracks stocks in China. Vale and Cliffs will likely rally in tandem with that.
WHILE THERE APPEARS TO be some healthy upside, these stocks are not without risk. For one thing they fluctuate more than the major indexes. Options traders expect volatility in these stocks to be two to three times the level of the S&P 500.
On top of that, if iron-ore prices do dip back down to the September low of $87 and stay there, then those attractive dividends at Vale and Cliffs could be at risk, says S&P Capital IQ's Larkin. Cliffs' dividend is much more at risk than Vale's, he says.
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