Iron Ore adds to commodity prices turning up in the last 2 weeks yet disconnect with mining stocks reaches historic levels

China announced yesterday that it will buy a record amount of iron ore this quarter, easing concerns about the engine of global growth. The Chinese government, which has just had a once-a-decade leadership transition, approved plans to build 1,254 miles of roads, nine sewage-treatment plants, five ports and a warehouse projects, and two waterway improvements. This is an addition to the 70 airports which are to be built by 2015. This is all a part of a $158 billion infrastructure programme announced earlier in the year.

With all these projects in the pipeline mining companies around the world are expanding output to meet demand, with an additional 174.6 million tons of production scheduled in 2013 from 30.8 million tons this year. China imported 686 million tons of iron ore in 2011, up 10.9% year-on-year. The top three iron ore suppliers for China are Australia, Brazil and India.

Iron ore prices have rebounded around 13%now from the lows of just under $100 reached last month. Meanwhile the likes of Kazakhmys and ENRC in particular that is exposed heavily to the iron ore price have continued to barrell lower. ENRC is actually down nearly 25% from the start of the month and Kaz 10%. This type of disjoint is pretty rare and we estimate ENRC to be trading at just less than 0.4 times book value – even lower than at the nadir in 2009.