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A Week To Forget For Iron Ore Prices

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Iron ore prices are firmly in correction territory, as Vale, a producer forced to cut over 90Mt of iron ore production capacity earlier this year after a mine disaster, is showing signs of recovery. The producer recently upgraded production guidance to a run rate of 340-345Mt/ year, up from prior 2019 guidance of 307-332Mt. Despite Vale producing 400Mt of iron ore last year, the production upgrade still promises to reduce a chronic shortage in the industrial commodity.

Iron-Ore-Prices-Fall

Why has the Iron Ore Price dropped?

This has occurred against an intensifying trade battle between the US and China, backed by falling steel inventories. China’s growth recently slowed to 6.2% in the June quarter, the worst number in the past 27 years, as the trade war hurt the second-largest economy. The slowdown has been particularly concentrated in manufacturing, where the PMI of 49.7 in July highlighted that the sector was still in contraction. The PMI (Purchasing Managers’ Index) is a measure of business activity, where a result of 50 separates expansion from contraction. To make matters worse, the debt-plagued construction sector has also provided lacklustre demand for iron ore. With China accounting for 70% of the world’s seaborne iron ore, any threat to the nation’s rapid industrialisation will be met with panic in iron ore markets.

Market sentiment has been strong towards the sector, which resulted in most companies meeting but not exceeding estimates. Rio Tinto (ASX: RIO) shares recently dipped, following the release of satisfactory half-year results. Fortescue has sold off the most heavily of all the iron ore players, declining 6.6% following Vale’s announcement. This underscores the continued vulnerability that the iron ore producer faces, despite rapidly paying down its debt and reducing its cost base. The company produces iron ore at the 58% grade, which is inferior to the 62% grade produced by the other major players and typically sells off far more in iron ore price corrections. Our research team took profits on Fortescue (ASX: FMG) earlier this year, after the company’s share price traded above our valuation.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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