David Einhorn recently spoke at the Great Investors' Best Ideas symposium in Dallas where he revealed that he is short iron ore. Einhorn joins Jim Chanos who is also bearish on the price of iron ore and some select iron ore stocks.
Einhorn stated that the equilibrium price for iron ore was around $80 but that it could be in the $60 range by 2014. His 2013 price target for iron ore is $100 next year.
The current price of iron ore is $120 per tonne. The price of iron ore dropped in 2012 to $100 per tonne before rebounding sharply in October. Speculators should note that the price of iron went from $20 in 2003 to over $160 in 2011 and Einhorn stated this price rise was a "bubble."
Einhorn appears to be bearish on Chinese GDP and that is his principal reason for shorting iron ore. He said that Chinese industrial growth has been far overestimated and that the country is spending billions on "useless projects" to prop up its GDP. Jim Chanos has made similar arguments in the past.
According to the hedge fund manager, Chinese growth rates have very likely peaked a reduction in Chinese demand could trigger steep declines in ore prices.
On the supply side of the equation, Einhorn sees a lot of supply and new production coming from Africa and Canada. He expects iron ore supply to grow in the mid teens over the next few years as miners expand projects.
Specifically, Einhorn noted that U.S. Steel (X) would lose $5.64 per share if iron ore prices went to $80 per tonne.