Andrew Feldstein of BlueMountain Capital spoke at the Harbor Investment Conference today and discussed the declining demand in the steel and iron ore industry.
The biggest headwind for the steel industry is how the demand for the product continues to decline in the world's largest consumer of steel, China. The steel industry of China is the largest exporter of the world despite of exporting only 7 percent of its total production.
Andrew seconded the bearish thesis on iron ore sector, one that has been put forward by several other famous investors, where the expansion in the supply chain is not supplemented by an equally booming demand. Iron ore ties closely into the production of steel and the consumption is contracting in each sector. In this regard, he picked Fortescue Metals Group Limited (ASX:FMG) as a short equity idea.
The costs related to iron ore mining and refining are increasing which puts Fortescue Metals Group Limited (ASX:FMG) in a tight position which is further intensified by the fact that the company almost makes all of its sales in China. Future projections estimate a decline in valuation but increase in mining and production costs. An idea is to go short on Fortescue Metals Group Limited (ASX:FMG) via Put options.
Fortescue Metals Group Limited (ASX:FMG) has previously been a short pick of Jim Chanos of Kynikos Associates. His thesis is also based on the falling iron ore prices and contraction in demand from China. David Einhorn of Greenlight Capital is also bearish about the iron ore industry where he has shorted a number of unnamed companies.
Einhorn was not deterred by the recent rally in iron ore prices which have been volatile for a while now, he said that the iron ore sector has outrun its boom and will decline eventually, so short iron ore positions will be profitable in the long term. Along with Chanos and Einhorn, Odey Asset Management's Absolute Return Fund also has a short position in the Australian iron ore company, it lost in the position in October.
BlueMountain's presentation also dicussed the Japanese steel manufacturer, JFE Holdings, Inc. (TYO:5411). The company is the second largest steel producer of the country. JFE Steel exports 50 percent of its produce and Feldstein pitched the idea to take an opportunistic position in JFE CDS spreads which have declined over the five years and are now at their lowest. With 25 percent JFE debt due to mature in next year and the determination of Shinzo Abe to devalue JPY, the credit spreads will likely undergo a rally and this gives the opportunity to take a long position. Andrew suggests that with buying $100 million in CDS, the chances of making a profit are huge.