FMG share price outlook: 2 drastically different views to consider

‘Iron ore demand could come under pressure if tightening anti-pollution measures start to affect steel output.’

What you need to know

Iron ore prices have remained elevated during the first two months of 2020 and so have the share prices of Australia’s big three miners – BHP Group, Rio Tinto and Fortescue Metals Group.

  • IG's Iron Ore instrument was up 14 points or 1.46%, at the time of writing and 67% of client accounts are long that product.

Despite iron ore's strength, it has been a volatile few months for the big three miners. Year-to-date the FMG and Rio Tinto share prices have both sunk lower, while BHP has traded modestly in positive territory.

With the above in mind, below we take a look at some of the highlights from recent Chinese industrial data compiled by Morgan Stanley – placing a particular focus on steel and iron ore data – given their importance to Australia’s mining behemoths.

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Steel exports ↑

Between January and February 2021, China’s steel exports drastically increased, with net exports rising 34% year-on-year. Imports were up 3% year-on-year.

On the production side of things, crude steel production reached 175.0 million tonnes, up 12.9% year-on-year; while finished steel reached 209.5 million tonnes, up 23.6% year-on-year.

Iron ore imports ↑

Between January and February 2021, Chinese iron ore imports rose 3% year-on-year, coming in at 182 million tonnes.

Emissions

Reports of the Chinese government’s plan to drastically cut Tangshan steel output (~40% in 2021) put pressure on iron ore prices this week.

Analysts from Morgan Stanley (MS) argued that these curbs would likely expedite the rebalancing of the iron ore market, saying:

‘We don't see China's steel cuts playing out as just a relocation of iron ore demand. Not only will ex-China ramping take time, but higher scrap use outside China will also negatively impact ore demand.’

Adding to that, while MS expects steel demand to remain resilient during the second quarter of 2021, it was pointed out that:

‘Iron ore demand could come under pressure if tightening anti-pollution measures start to affect steel output.’

MS is underweight Fortescue Metals Group and Mineral Resources as a result of their bearish view on iron ore.

The other side

Macquarie analysts have a completely different view, noting that iron ore remains their preferred exposure over other bulk commodities, while arguing that:

‘Buoyant iron ore prices and positive leading indicators (such as relatively low port stocks and positive steel margins) underpin our bullish stance on iron-ore exposure.’

FMG is also actually Macquarie’s favoured iron-ore large cap.

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