With iron ore prices nearing $80 we think it is time to reassess positions across the Fortescue Metals Group (FMG) curve
The outlook for steel has been driven by Chinese property and fiscal stimulus, which has in turn steered coking coal and iron ore higher. Over the medium term however, oversupply is going to be the more important theme for iron ore. Rio, BHP, Vale, and FMG results have shown year on year production increases.
According to Thompson Reuters’ commodities team (emphasis mine):
“…we believe that with major players even slightly increasing output and at the same time being at the bottom of the cost curve, significant product cuts are unlikely and therefore we do not see the surplus in the iron market abating any time soon. As a result, prices will have to fall in order the market to balance.”
Source: Thompson Reuters, Dalian Iron Ore Futures
Figure 1
FMG’s bonds have been remarkable performers, but there are better opportunities with the bonds’ pricing smoothing off over the past few weeks and remaining fairly immune to the “Trump Thump”, as shown in Figure 2.
FMG bond price movements
Source: FIIG Securities
Figure 2
As a switch option, we believe that Genworth Financial Inc.’s recent addition to the USD DirectBonds list is attractive. Genworth Financial Inc. is listed on the New York Stock Exchange (NYSE) with a market capitalisation of USD2.6bn and is the parent of the domestic Genworth Financial. There is some event risk around an acquisition of Genworth’s outstanding shares by China Oceanwide that is expected to complete prior to 31 August 2017, but is subject to approvals.
Source: FIIG Securities
The swap will crystallise any gains in FMG holdings and remove downside commodity risk, while gaining exposure to a bond we believe is currently undervalued.
Orders can be placed online via our client platform MyFIIG.
Note: Prices accurate as at 15 November 2016 but subject to change.