Market Report: Ferrexpo hit by commodities warning

Ferrexpo underperformed the market yesterday after Deutsche Bank said that, based on new more bearish assumptions for the iron ore market, investors should "sell" the stock.

A sharp drop in volumes is likely to bear on the outcome of upcoming pricing negotiations and is set to impact iron ore producers like Ferrexpo, said the broker, expecting volume cuts to "proceed further into 2009 than indicated by the producers and flow on to coking coal production".

Deutsche said: "We are seeing two types of volume cuts in this slowdown: the more traditional cuts in production as miners and smelters become loss-making in a declining commodity price environment (predominantly the base metal producers); and the unusual production cuts in profitable operations due to the rapid demand slowdown (predominantly iron ore at this stage and representing between 30- 50 per cent rate cuts for some producers)." The broker reduced its earnings estimates for Ferrexpo by more than 80 per cent for 2009 and 145.3 per cent for 2010. The stock closed down 6.71 per cent, or 2.5p, at 34.75p.

Overall, the FTSE 100 gained 81.2 points to 4,381.26 and the FTSE 250 advanced 202.86 points to 6,151.63. Investors continued to buy on hopes that the spate of government stimulus packages might ease the global economic situation. Some traders remained wary, however, expressing surprise at the fact that the market had managed to hold on to Monday's gains despite some grim data on UK manufacturing and retail.

David Jones, the chief market strategist at IG Index, said that, while further gains looked possible, "it would probably be a bit ambitious to suggest that the current optimism is going to continue for very long".

On the FTSE 100, Lonmin fought hard to keep its place among the blue chips, gaining 6.88 per cent, or 40p, to 621.5p. Many expect the results of the FTSE index review, due after close today, to confirm the platinum miner's relegation to the FTSE 250. The reshuffle is based on prices at close last night. Other candidates for demotion include Fresnillo, the Mexican silver miner that made its market debut at 555p in earlier this year, but has suffered as commodities prices fell and the global economic storm gathered place. The stock was up a slight 0.7p at 139 last night.

The transport company Stagecoach, up 11.85 per cent, or 13.6p, at 128.4p, and the oil services specialist Wood Group, up 7.9 per cent, or 12.3p, at 168p, may also face demotion. Invensys may keep its place after surging by 11.41 per cent, or 15.9p, to 155.3p.

The supermarket group WM Morrison, up 6.2 per cent, or 15.5p, at 265.5p, was strong after new industry showed it had continued to make market share gains in the UK in the last quarter.

On the second tier, Imperial Energy gained 17.88 per cent, or 152p, to 1002p after ONGC Videsh, the Indian oil and gas group that is trying to acquire the business, sent out its offer document to Imperial shareholders. ONGC is bidding 1250p per share. Market sources said the spread was down to fears that if ONGC did not receive acceptances from investors representing 90 per cent of Imperial shares, it might walk away. One analyst said that given the weakness in commodities stocks, "shareholders would be much better of accepting the offer than rejecting it", adding that the share price will fall sharply if ONGC does not receive the requisite acceptances. The fund manager Baillie Gifford and the board have already consented to the takeover and together speak for about 15 per cent of the shares. Shareholders representing the remainder have until 1pm on Tuesday 30 December to give their assent.

Elsewhere, traders cited a short squeeze around Johnston Press, the regional newspaper group that was up 13.9 per cent, or 1.22p, at 10p. The recent market rally caused by US president-elect Barack Obama's infrastructure spending plans was mentioned as the trigger for the squeeze which also boosted DSG International, up 15.91 per cent, or 1.75p, at 12.75p

On the downside, PV Crystalox Solar was the weakest, down 11.87 per cent, or 11.75p, at 87.25p after Q-Cells, Germany's largest solar power company, reduced its earnings outlook for this year and the next.

Among smaller companies, New Star Asset Management was down 8.82 per cent, or 0.15p, at 1.55p after confirming it had received a number of expressions of interest in the business and was considering a possible sale as a "strategic alternative" on top of the proposed debt for equity swap with lenders. New Star added it had had no discussions regarding an acquisition of its ordinary shares, suggesting that a sale was only likely after the planned restructuring is completed.