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Why one top broker remains bullish on Australia's big three miners

Iron ore prices remain elevated, issues in Brazil re-emerge.

Iron ore Source: Bloomberg

In December we wrote:

‘Westpac economists expect iron ore prices to end out CY20 at US$65 per tonne. At iron ore’s current price of US$92.34 per tonne – this would imply potential downside of approximately 29%.'

Since then however, the emergence of the global coronavirus pandemic has seen the economic environment, particularly commodity markets – shift dramatically.

Interestingly, while though the pandemic hasn’t yet impacted Australia’s iron ore market – with Chinese demand remaining robust over the last few months – today Dow Jones reported that ‘Brazil’s deadly coronavirus outbreak has disrupted global supplies of iron ore […] pushing the price of the steel ingredient to a seven-month high.’

On Wednesday this resulted in iron ore’s 62% front-month Dalian Commodity Exchange futures contract soaring 10%, to hit an intraday high of ~US$107 per tonne.

Brazil’s 2019 Brumadinho dam disaster also drove significant price volatility in iron ore markets during 2019.

CME’s 62% iron ore front-month futures contract experienced significantly less pronounced gains, though continues to trade around multi-year highs, last trading at US$90.65 per tonne.

FMG, BHP and Rio Tinto share prices in focus

Besides strong iron ore prices, Dow Jones further noted:

‘Higher iron-ore prices will add to pressure on profits at steelmakers globally, but are a boon for miners including BHP Group and Rio Tinto.’

This fact looks well known to investors, with Australia’s big three miners – BHP Group (BHP), Rio Tinto (RIO) and Fortescue Metals Group (FMG) – all moving higher in recent days.

At the time of writing and over the last five sessions, RIO was up 11.47%, BHP up 10.61% and FMG, unsurprisingly as the pure-play miner of the three, was up 12.77%.

On Wednesday, Macquarie Wealth Management, which has long been bullish on Australia’s iron ore miners, wrote:

‘We remain positive on stocks with iron-ore exposure due to strong cash flow yields and medium-term earnings upgrade momentum. FMG and RIO preferred in large caps (BHP’s near-term earnings risk heightened by weak coking coal and energy prices).’

The investment bank has Outperform ratings on all of Australia’s big three iron ore miners.

Elsewhere, for the week ending May 15, Chinese inventory levels have continued to fall. According to the Metals Market Index (MMi), iron ore inventories at Chinese ports fell by 1.17 million tonnes, to 101.79 million tonnes, while steel inventories in China collapsed 7.86%, or 1.67 million tonnes to 19.63 million tonnes.

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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