Even though Kumba Iron Ore (KIO) will be releasing very impressive six months results, the most upsetting aspect for investors and world stock markets, is news that the Chinese economy is heading for a slump.
Kumba, the JSE listed subsidiary of Anglo American, is one of South Africa’s major producers of iron ore, much of which it sells to China. Having had a very good run on the iron ore price earlier this year to $90 a ton (see chart), the price has moved significantly lower and there are rumours in the steel industry that Chinese inventory levels are growing all the time.
None of this is good for Kumba, and analysts fear that if China’s demand for steel is going down, then its economy is headed in the same direction.
The company indicated that headline earnings per share (HEPS) and basic earnings per share (EPS) for the period would be at least 20% higher than the previous six months ended 30 June 2016; and shareholders are advised that headline earnings for the period are likely to be between R4,373 million and R4,741 million, with basic earnings for the period expected to be between R4,355 million and R4,722 million.
“While the profits look very good from the past six months, China is currently experiencing a slowdown in economic activity which will lead to a reduction in their demand for iron ore,” said one Cape Town analyst.
Kumba will experience a feeling of dramatic loss as their profits for the next six months are expected to take a hit.
In addition to the Chinese economic crisis, another potential problem for Kumba is the threat of US president Donald Trump imposing tariffs to prevent China and others from dumping cheap Chinese steel.
Another analyst, who preferred not to be named said, “iron ore has swung from a bear to a bull market within three months – but looks set to return to a bear market on lack of demand from the Chinese economy.”
Jeremy Woods trained for three years as a journalist on the Herts Advertiser, St Albans, in the U.K. Once qualified, he left England to work as a crime reporter on the Vancouver Sun in Canada. After three years, he worked for the Los Angeles Times as a trainee financial journalist, spending most of his time reading company accounts and finding publishable stories in them. He moved to South Africa and for the last five years in journalism worked for the Sunday Times, Business Times, as Investment Editor. He has also published a financial thriller called “Special Payments”, which was a best-seller on publication, and optioned three times for a film.