Rio Tinto, FMG and BHP shares: Coronavirus and the iron ore outlook

Until supply conditions in the iron ore market normalise, BHP posits that ‘prices are likely to be volatile’.

BHP and FMG share prices: recent results in focus

It’s been a busy few weeks for Australia’s mainstay iron ore miners.

This week, BHP Group (ASX: BHP), the largest of the three, reported a set of interim results that failed to generate much excitement.

Here, the miner showed good top and bottom-line growth, as well as revealed an impressive interim dividend of US65 cents per share. Investors however reacted despondently: BHP’s share price range traded for much of the week.

Fortescue Metals Group (ASX: FMG) fared significantly better: citing record interim revenue growth (+83%), record earnings (NPAT) growth (+280%) and an impressive interim dividend of 76 cents per share.

In response, FMG saw its share price edge up around 1.5% over the last five trading sessions. The stock fell today however.

Though the price action here was somewhat divergent, both company’s interim results were boosted by buoyant iron ore prices from the back-half of CY19.

Specifically, across the half, Fortescue reported a realised iron ore price of US$80.36 per dry metric tonne; BHP Group by comparison recorded an average realised price of US$78.30 per wet metric tonne.

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Rio Tinto share price: a slight downgrade

Though Rio Tinto (ASX: RIO) is yet to report its latest set of earnings (with is expected to unveil its FY19 Results on 26 February), the company nonetheless made news this week with a disappointing Trading Update.

Here, the company downgraded its CY20 shipment guidance to between 324 million tonnes and 334 million tonnes (on a 100% basis). This downgrade was attributed to Tropical Cyclone Damien, which caused extensive damage across the company's Pilbara Network, impacting 'roads, electrical and communications infrastructure and accommodation.'

The company had previously guided for CY20 shipments of between 330 million tonnes and 343 million tonnes.

Iron ore and oil prices: what’s the outlook?

Ultimately, the outlook for iron ore remains a ‘volatile’ one – driven by a confluence of factors, including: the expected return to more stable demand-supply dynamics, as well as the Coronavirus and its currently hard-to-quantify impact on Chinese and global economic growth.

Given that, it’s interesting that FMG made no mention of the coronavirus and its potential associated impact on the iron ore market as part of its interim results releases.

BHP Group was more explicit in this regard, noting that near term market volatility will be driven by a number of factors, including the Coronavirus, trade policy and geopolitics.

Speaking of the iron ore outlook, management noted that:

'We expect supply conditions to return to a more normal path on a one to two year timeframe. Prices are likely to be volatile as that adjustment plays out. High cost production, on a value-in-use adjusted basis, from Australia or Brazil is expected to determine market price in the longer term. Quality differentiation will remain a durable element iron ore price formation.’

The 62% iron ore Fe Fines spot price traded ~US$85 per tonne today – up from recent coronavirus-induced lows – though down from December 2019 highs.

Finally, and speaking to the outlook for crude oil prices – which make up 13% of the company’s earnings (EBITDA) – BHP Group noted that 'shifting global growth expectations and geopolitical risk were arguably the two major forces driving the market over the last six months. We anticipate a net demand loss due to the 2019 coronavirus disease outbreak in the near-term.'

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