Iron ore has taken a beating this year, with prices correcting over 30 percent from their year-to-date high of $135 a ton in January. Surprisingly, some analysts see this as the perfect buying opportunity.
"It is time to tactically go long iron ore swaps and Fortescue Metals," Conor O'Malley of independent research firm View from the Peak said in a note. The Fortescue Metals Group Ltd (FMG) is the third largest iron ore company in Australia.
While a weakening real estate market in China, which accounts for around two-thirds of global iron ore purchases, coupled with a flood of ore supply suggests further gloom for the market, O'Malley said this shouldn't put investors off.
"Accepting all of the above, it is still time to buy iron ore exposure as we move into the Chinese winter," he said.
Among factors that underlie iron ore's vicious decline this year are reports that commodities like iron ore and copper are being used as collateral for financing deals in China, raising concerns that a crackdown by authorities could dampen demand.
But View from the Peak's O'Malley is confident that the market's dynamics will turnaround soon. "A 30 percent correction in any commodity market will produce a supply reaction. Iron ore is no different," he said.
He pointed out that weak prices have forced a number of Chinese iron ore miners to go offline, resulting in a tighter domestic supply. This should put upward pressure on prices especially as the market heads into the harsh Northern winter which normally reduces supply, he said.
While O'Malley said iron ore prices potentially have another $8 per ton to fall, he noted the upside potential of $17 from current levels, making the risk-ratio compelling.
Other analysts agreed that the price of iron ore shows signs of stabilizing around current levels of $93 per ton. There are several positive factors to prove this point: The recent drawdown in inventories in China, which suggests an appetite for buying could become stronger and the diminishing panic over the issue of commodities being used as collateral.
In July, China's iron or imports rose 11 percent on month as buyers took advantage of lower prices. Australian miners likely stand to benefit most; Australia's share of Chinese iron ore imports was 61 percent of the total in June and 56 percent in the first half of the year compared with an average of 51 percent in 2013.