For 40 years iron ore suppliers had a system of annual contracts for the pricing of iron ore. This scheme favored buyers, as in a rising demand environment meant they were benefiting from cheap pricing, which left the producers leaving billions of dollars on the table. Now we've got the whales of iron ore miners, Vale , Rio Tinto and BHP Billiton are setting quarterly renegotiation for ore contract pricing.
This means that the worm has turned, and instead of foreign automakers and steel makers benefiting from a locked in price that quite simply was ludicrously low, the prices are rising more dramatically and thus squeezing foreign steel makers and their customers. Iron ore miners have pushed the price of ore upward to more than double its '09 level of $68 per metric ton.
I show Q1 of 2010 iron ore prices were between $100 and $110 per ton, but that looks cheap versus the spot, which is now over $150 per ton before freight!
So here is my pitch as to why US Steel makers are priced far too cheap and should be one of our focus areas until and unless the the whales are forced to change back to the old system. This is the price changing structure only affects iron ore sold as seagoing cargo! Since American steelmakers operate their own iron mines or can purchase from the largest remaining North American iron ore miner, Cliffs Natural Resources.
Thus my thesis that AKS , STLD , NUE and X should be great long-term investment vehicles for us. Our subscribers to our Covered Call Investor as well as other publications will note that we've added these stocks to our focus list and even our fast money investors/traders will notice more frequent posts on stocks in this sector.
I note for you that AKS is indeed fast money today, as some 8,400 calls trade at the May 24 call strike versus an open interest of just 999 contracts. The surge in block trading pushed up volatility to 52.5 from a 30-day avg of 49.8.
I think conservative investors will like buying the May 23 calls against the May 26 calls (1:1) for a net of $1.35 - $1.40, while a more aggressive player may favor buying the at-the-money May 24 calls against the May 27 calls (1:1) for $1.10.
“When your work speaks for itself, don't interrupt.”
Follow Jon Najarian at http://twitter.com/optionmonster
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Trader disclosure: On Apr 5, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AA), (AAPL); Finerman's Firm Is Short (IYR), (IWM), (MDY), (SPY); Finerman's Firm Is Long S&P Puts; Finerman Owns (AAPL); Finerman's firm Owns (TJX); Finerman's Firm Owns (WMT), (SKS); Terranova Is Short (SHLD), (EL), (CAL), (UAUA), (FDX); Terranova Is Long May 2010 Crude Oil Futures; Jon Najarian Owns (AKS) Call Spreads; Jon Najarian Owns (STLD) Call Spreads; Jon Najarian Owns (X) Call Spreads; Jon Najarian Owns (NUE) Call Spreads; Jon Najarian Owns (CREE) Call Spreads; Jon Najarian Owns (DF) Call Spreads; Jon Najarian Owns (FCX), Is Short (FCX) Calls; Jon Najarian Owns (AAPL), Is Short (AAPL) Calls; Jon Najarian Owns (RIMM), Is Short (RIMM) Calls; Jon Najarian Owns (AAPL) Call Spreads; Jon Najarian Owns (AKS) Call Spreads; Jon Najarian Owns (FCX), Is Short (FCX) Calls; Jon Najarian Owns (IGT), (IGT) Calls; Jon Najarian Owns (NUE) Call Spreads; Jon Najarian Owns (RS); Jon Najarian Owns (TJX), Is Short (TJX) Calls; Jon Najarian Owns (WMT), Is Short (WMT) Calls; Jon Najarian Is Short (RIMM) Puts; Karabell Owns (FCX), (AAPL), (RIMM), (SLB); Edwards Owns (UUP); Edwards Owns (TM)
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