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3 Factors Iron Investors Should Consider

Michelle Smith Exclusive to Iron Investing News

Soaring iron prices have drawn investors, but recently stalled prices, timid buying,

and increasing skepticism are painting an uncertain picture of the future. Some

analysts predict that the joyride is ending. Others say its too early for an exit. As

investors decide, there are certain matters they should keep their eyes on.

Oversupply and emerging producers

Profit is attractive and that could be part of iron ores demise. Xu Lejiang, CEO

of Baosteel, Chinas second biggest steelmaker, warns that the bubble will burst.

Everyone who has money rushing to invest in iron ore, said Lejiang in a

recent Bloomberg interview.

The worlds three major iron producers, Vale (NYSE:VALE), Rio Tinto (NYSE:RIO)

(LON:RIO) and BHP Billiton (NYSE:BHP), who have plans to invest $45 billion in their

mines. However, this vast increase in supply is set to arrive at a time whenpredictions about Chinas growth have been downsized and steel production may be

set to decline.

Significance to investors:

Iron ore prices will definitely fall at some point because the supply-demand

situation will have a turnaround, Lejiang said.

Noting that a lot of investors only dig iron ore on the stock market and they will

never see physical output from their mines Lejiang warns that the biggest losers

are likely to be speculative companies that havent started production and theirinvestors. This prediction is supported by a 30-50 percent drop in 52-week share

prices for explorers and developers versus a 10 percent drop for producers.

Chinese electricity shortages

This summer China, the worlds largest steel exporter, may face its worst power

shortage since 2004. At a time when electricity consumption peaks, suppliers will

provide their consumers with less energy intentionally.

The government controls electricity prices, but it appears to be ignoring the

increasing costs of coal to produce it. A New York Times article, quotes utility giant

China Power Internationals chairwoman warning that one-fifth of Chinas coal-fired

power plants could face bankruptcy without rate hikes. The plants are responding

by operating for fewer hours and scheduling disruptive projects during the summer.

Significance to investors:

When power shortages hit last year, some small steel producers were forced to cut

production or to close. Summer isnt here yet, but in someparts of China,

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production is already being affected and small mills are expected to bear the brunt

again. Problems have not reached the north, where steel giants operate, but mills

are starting to shun stockpiles and are beginning to operate hand to mouth,

leading to speculations of decreased iron demand.

The New York Times reports that Chinas electricity shortage has already

contributed to a 10 percent decline in commodity prices, such as iron.

Japanese steel production

Japans natural disaster did not shake the life out of the nations steel industry.

Production in April was down for the second month, but was nowhere near the 2

million ton drop some analysts expected. Following the events in March, it was

thought that Japanese steelmakers would be absent from the market for a while. As

a result, there were predictions that iron prices, which had been upward bound,

would be eased due to supplies left unpurchased by the Japanese, a major buyer.

Significance to investors:Despite uncertainty in the Asian steel market, a current oversupply of steel, and

obstacles such as electricity shortages caused by the natural disaster, Japans

steelmakers are resisting major production cuts. Iron prices were expected to dive

due to Japans hiatus and to rebound only when the nation was fully back in the

game. But the World Steel Association says that the Japanese steel industry is on

the road to full recovery now.