Short seller Jim Chanos was interviewed by Bloomberg. Chanos continues to be bearish on China and is now even bearish on Australia.
The most leveraged China construction short opportunity is Fortescue (FMG.AX) The company is in the process of expanding capacity nearly three-fold, from 55 million tons a year to 150 million tons a year. The company is vulnerable due to this massive capital investment. VALE has also ramped up capex which could prove to be a faulty strategy given that China is slowing.
Secondly, the prices of iron ore are tumbling. Iron ore has fallen from a high of US$180 a ton two months ago, to $131 a ton now. What is lost on most mainstream media is the fact that China’s imports of iron ore fell sharply, from 60.6 million tons in September, to 49.9 million tons in October.
We’ve previously covered the problems in the Chinese real estate sector.
Fortescue bulls claim that there are long-term “pay or take” contracts in place with Chinese steel mills. Investors are banking on these contracts being fulfilled. During the Financial Crisis in 2008, Chinese steel mills commonly reneged on these agreements. Consequently, iron ore producers such as Fortescue had to reduce prices.