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Where next for RIO, FMG and BHP as iron ore flirts with $100/t?

As iron ore prices continue to trade at multi-year highs, we examine some of the future expectations one investment bank has for Australia’s big three miners.

As the Australian Financial Review reported yesterday:

‘Iron ore prices shot through $US100 a tonne on Friday, rising 5.5 per cent to $US102.39 a tonne, driven by supply concerns as Brazil is hit particularly hard by the pandemic.’

That bullishness continued today, though eased off a shade, as CME iron ore futures continued to flirt with US$100 per tonne price levels. At the time of writing, the June contract traded at U$99.16 per tonne; while the July contract traded mildly below that, at US$97.28 per tonne.

At its recent peak, the July contract hit US$109.28 per tonne. Looking further out, CME iron ore futures don’t trade below US$70 per tonne until October 2022.

With Chinese demand remaining elevated and concerns about Brazil’s coronavirus (Covid-19) case count the second largest in the world – this extreme price action is not without merit.

The central issue here, according to analysts at Citibank, is that ‘Rising infections among workers may prompt the miners or local authorities to impose more draconian quarantines, which could limit productivity or even close mines.’

Brazil currently has 529,018 reported cases of the Coronavirus (Covid-19).

BHP, Rio Tinto and FMG share prices in focus

As a result of the above, Australia’s big three iron ore miners – Rio Tinto (RIO), BHP Group (BHP), and Fortescue Metals Group (FMG) – have seen their share prices rise significantly in the last five sessions.

FMG – as the pure play iron ore miner of the three – looks to have been the largest benefactor thus far, with its share price rising around 8% over the last five sessions. FMG however has pulled back today, with its stock down 1.42% at the time of writing, amid general market volatility.

Whether iron ore prices will remain elevated however itself remains to be seen. Indeed, as Morgan Stanley points out, market participants remain sceptical of iron ores staying power, noting that ‘A rising spot (US$97/t) has not shaken the market’s expectation of a declining iron ore price, in-line with the MS view.’

Even so, the investment bank goes on to say that:

‘The miners in our coverage appear well positioned to deal with an uncertain commodity pricing environment, with all showing net cash or low net debt positions. FMG and BHP currently have the highest levels of gearing at 18.7% and 17.3%.’

Morgan Stanley is Equal-weight FMG, Overweight BHP and Equal-weight RIO.

How to trade the iron ore market

Where do you stand: are you bullish or bearish on the outlook of the iron ore market. Whichever way you lean, you can trade any of the ASX-listed mining stocks we have discussed – long or short – through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) BHP Group using CFDs, follow these easy steps:

  1. Create an IG Trading Account or log in to your existing account
  2. Enter ‘BHP Group’ or ‘BHP’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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