The most crowded trade - Short FMG - and why we would not want to be short.

Background to the consensus Short FMG trade and why we are Long FMG.
John Deniz

Paragon Funds Management

The street has become increasingly bearish on Iron Ore and FMG given its levered balance sheet, with sell side analysts now seemingly competing to downgrade their Iron Ore price forecasts after a 70% fall from its 2013 high. Indeed Iron Ore is an oversupplied market and now in surplus. The Seaborne Iron Ore market is ~1.5btpa, which only recently had annual deficits of ~50mt. As the lowest-cost majors Vale, RIO and BHP continue to materially expand production, the Seaborne market is projected to swing into material surpluses of ~200mtpa+ by 2016. However if Iron Ore were to fall below recent lows of US$47/t (or hit US$35/t as some pundits were calling for), you would see material supply curtailments and the industry correct itself. In our view Iron Ore bottomed in early April (its price having bounced ~38% off its lows) and FMG bottomed soon after, when it refinanced its near term maturity debt. With FMG liquid, solvent (no debt now due til 2019), achieving ongoing cost reductions, a shift from “ongoing major expansion mantra” from the majors, falling China port inventories and China Steel Mill restocking underway, and FMG still being one of the most highly shorted stocks on the ASX (ie. a massive short squeeze candidate), we would not want to be short FMG. In fact we went long at $2.11/sh on the 23 Apr 2015 for these very reasons.  For our full write up on FMG please see our monthly: (VIEW LINK)


1 stock mentioned

John Deniz
Chief Investment Officer
Paragon Funds Management

John co-founded Paragon in 2012 and became principal and majority shareholder from 2017. John is responsible for executing the investment strategy and managing the Paragon Australian Long Short Fund. John has had 16 years in financial markets,...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment