If you’re not sure what’s happening in iron ore, the hottest of all Australian commodity exports, don’t worry because you’re not alone.

Since the start of the year, as problems in Brazil have gone from bad to worse and Australian miners have seen their exports trimmed by port closures in WA’s cyclone alley, the iron ore price has rocketed up by 50% to a five-year high of more than $US100 a tonne.

The share prices of iron ore miners have reacted strongly to the cash flow windfall. Fortescue Metals, for example, is up 94% from $4.15 at the start of the year to $8.95.

But in the good news can be found a single word which could be a problem for anyone arriving late at the iron ore party – windfall, because there is another way of looking at Fortescue.

Since late May, Fortescue’s share price has fallen by 14% as the effects of a bonus dividend have worn off and questions have started to be asked about the long-term iron ore price.

Significantly, half of Fortescue’s recent price correction occurred last week as the stock fell from $8.64 to $8.05.

In time, the high prices cause largely by Brazil’s outage will end and the full impact of the China v US trade war will become better understood, with the ultimate downside being a global recession.

And that means everyone will be using less steel (and less iron ore).

It is possible that Brazilian iron ore supply could remain restricted for several years as government inquiries and legal actions drag on, but if that happens alternative supplies from India, Iran, South Africa and Australia will increasingly fill the void.

Understanding that high prices are the ultimate cure for high prices in the commodities sector is a critical lesson for investors because at $US100/t the owner of every mothballed iron ore mine in the world is dusting off production plans, hoping to catch the high tide before it retreats.

Before considering a few expert opinions one small example best tells the story.

Centaurus Metals, a small explorer which has flown high several times in the past, said it is undertaking a new pre-feasibility study into its Jambreiro project in Brazil with the aim being to produce a million tonnes of iron a year in time to catch the high price. The market reacted by lifting Centaurus by 22% from 0.7c to 0.9.

Some investors have been here before because back in January, 2011, during the last iron ore boom, Centaurus was planning to develop Jambreiro as a three million tonne a year mine, a plan which saw the stock rise to 65c – though the mine was never developed.

This time it might be different but a lot depends on the iron ore price and iron ore can be awfully fickle as these investment banks comments demonstrate.

RBC Capital Markets was first to nail its colours to the mast, with a provocative research report titled “From iron roar to iron bore” with the clear message that “the tightest point in the iron ore market is now” and while the average price for this year would be an attractive $US82/t it would drop next year to $US65/t.

Morgan Stanley chimed in a few days later with a report titled “iron ore’s peak in sight” because Brazil was rushing to make up the shortfall created by its dam-collapse shut-down with Chinese mines joining the rush to re-start production.

Goldman Sachs was more optimistic about the future iron ore price because of doubts that supply could quickly plug the gap. It reckons there could be a worldwide shortfall in the supply of seaborne iron of between 30-and-40 million tonnes a year this year and next with the net result being a slow decline from its current peak to $US80/t next year and then down to $US72/t in 2021.

ANZ also reckons supply-side issues will persist into next year as Brazil struggles to repair its damaged mines and bruised reputation with the private average $US85/t this year and with “only minor relief emerging in 2020”.

Next station – all winners off, please

Bank price tips aside there are two other critical factors in the background of the iron ore market, neither positive for the price.

Firstly, China’s steel-makers are being squeezed by the high iron ore price and uncertainty about the longevity of a building boom created by government spending designed to offset the effects of the trade war.

As was noted in the Lex column of London’s Financial Times newspaper last week there are strong hints that “iron ore’s uncommonly good performance cannot last much longer”.

More importantly, the companies which could really make hay while the sun is shining on iron ore, Australia’s big three of Rio Tinto, BHP and Fortescue, are not risking capital on expanded capacity, preferring to harvest the windfall cash.

There are two factors behind the lack of supply response from Australia’s miners – it takes time as well as capital to increase the production and export of more ore, and by the time the capital is sunk the price is expected to have retreated.

Where does that leave investors in iron ore stocks?

Enjoying the ride if they’re already on board, and standing at the station waving the iron ore train goodbye if they’re not.

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