The ultimate bear, Tom Price positive and the ultimate bull,...

The ultimate bear, Tom Price positive and the ultimate bull, Charlie Aitken negative...what is going on at the institutions?

From Charlie below:

Good morning, but not such a good morning if you mine iron ore or copper..or someone who provides services to them..

It seems to me that the combination of financing trades vs. physical unwinding, high trader inventories and a genuine supply response arriving, has finally pulled the rug from spot iron ore and spot copper.

Spot iron ore failed to bounce (US$104t), which is a very concerning sign after the previous night’s carnage, while copper on COMEX (May contract), fell to $2.95lb, a clear technical breakdown.

I think this is a MAJOR event in both commodities and most likely the end of ‘super cycle” pricing for both commodities.

While BHP/RIO etc. addressed the market about their long-term views of iron ore demand yesterday (they hope so), this is a story about supply. Iron ore supply is going to exceed demand this year and that is pretty much all that matters.

Iron ore supply will exceed demand for the next few years at least unless China increases steel production sharply, which with Shanghai steel prices at 5 year lows seems unlikely. The chart below reminds you where Chinese crude steel production has come from/to today.

The same is occurring in copper, with the market moving into surpluse this year.

In both commodities this is a simple supply vs. demand equation. Supply is now exceeding demand which leads to falling spot prices. These falling spot prices are exacerbated by financing trades.

However, the clear problem for Australian miners is the AUD/USD cross rate is proving quiet resilient despite falling spot commodity prices. The AUD/USD is down to 89.78usc this morning, but that is nowhere near enough of a fall to offset the damage in iron ore and copper.

What happens next is the analysts and strategists who set consensus come around to my conclusion that this is the end of the super cycle in iron ore and copper prices and start downgrading forward commodity price assumptions (FY15) and forward mining equity EPS and DPS. Suddenly, all these “low P/E’s” won’t be so low and “yield support” will be dramatically less.

I just get the feeling using US$80t in FY16 for iron ore is the right number and US$2.50lb for copper will prove right. The AUD/USD to use in FY16?? I feel 80usc, but if the East Coast continues to improve it could be 85usc.

Over the next few days I am going to get our analysts to run those forecasts through our models and see what EPS and DPS is spat out in FY16. The scale of the potential downgrades will be large.

While I have recommended selling/shorting FMG from $6.00, my point this morning is it is NOT too late to sell/short iron ore or copper producers. The analysts world still seems to think this is a buying opportunity, I think it’s the end of “super cycle “pricing..Nothing like this is ever “priced in”. NPV’s are meaningless.

What will also happen is commodity hedge funds and pure commodity equity funds will see redemptions, adding to the selling pressure.

I also think this will be the catalyst for the next leg down in mining services stocks. The ONLY one I recommend is the diversified Seven Group Holdings (SVW).

In the words of Dr Seuss, don’t cry because it’s over, smile because it happened.