macquarie bank scenario for fmg

Yesterday my broker sent me a scanned copy of the latest Macq. Bank (ICEquitiesResearch)recomendation for their clients, re FMG published on 11/06. I am unable to paste onto HC but main points are:
2009 PE: 27
2010 PE: 11
12 months SP target: $4.91
Recomendation: underperform

Essentially MQB argue that current high prices have spurred IO producers around the world to invest massively to ramp up production. They estimate that world IO mkt will head into oversupply situation well before FMG reaches its own projected prod of 150M tons.

MQB research note: 'A forecast IO surplus in 2nd half 2008 will be the most likely catalyst for underperformance. SP target $4.91'.

My scenario is that whilst FMG have proved many doubters wrong re reaching prod on schedule they now face:
1) Current very prolonged negoiations with BHP/RIO and China are unlikely to produce contracts that can match current IO spot prices.
2) High commodity prices and high energy prices are hitting world economy at the worst possible time. USA is in a housing price collapse estimated to reach 25%!! Situation in UK, Spain and Italy/France is also very dire.
3) China cannot pass on big increases of manufactured goods into weakening overseas markets.
4) Chinese stock index has dropped 57% since November! Fell 7.7% in single day on tuesday. Apartment prices down 25%+ since January. Many Chinese banks have huge amounts of bad debt.
5) Put these together and the outlook is grave. China is not isolated from world recession and high inflation.

Conclusion: Ironically, a big increase in IO price will actually hasten the decline in China's growth and cause demand for IO to fall even faster than would have been otherwise. BHP etc should consider this when driving for 80% increases.

Will FMG fall to MQ est. of $4.91? I think Harbinger are looking to offload at least half their core investment in FMG.... and wanting to do so soonish. The most likely buyer is a Chinese steel maker/s. Harbinger are fully aware of stress in China (and India) and i reckon (have no evidence) they will bail out at $7-7.50.

This then will set the medium term price for FMG. A bigger price drop may see FMG put its planned extension into Chicester range on back burner while it consolidates.

I could be wrong. DYOR.