Why are the BHP, FMG and Rio Tinto share prices crashing?

'China seems to be gearing up for a big amount of stimulus. That will be in the form of infrastructure investment, which is base-metals heavy, and will really hit the economy later in the year.'

BHP, FMG and Rio Tinto share prices in focus

To answer the initial question: not because of iron ore prices – which remain elevated, with the 62% Fe Fines spot price hovering around the US$90 per tonne mark.

And though iron ore prices have held up, equities heavily leveraged to the commodity, carrying the risk of well, being equities, have not fared as well.

Indeed, as fears surrounding the economic fallout from the Coronavirus (COVID-19) continue to escalate, equities across the board have been brutally sold off. In the last month alone, BHP Group’s (ASX: BHP) share price has fallen ~35%, Fortescue Metals Group (ASX: FMG) has dropped ~20% and Rio Tinto (ASX: RIO) has seen its stock fall ~24%.

(In saying this, FMG did stage a mini rebound this morning, up as much as 7% at one point.)

BHP’s more pronounced share price fall is likely explained by its heavier reliance on oil – which unlike iron ore – has collapsed in the wake of a Coronavirus-led supply demand shock. In H1 FY20 for example, BHP derived 13% of its earnings (EBITDA) from its petroleum division.

We discuss that oil shock, as well as the top three currencies impacted by it in more detail here.

Though likely not of much consolation to BHP shareholders, Macquarie Wealth Management makes the interesting point that lower oil prices ‘should push freight rates lower […] and drive further margin expansion for miners.’

More broadly speaking, the investment bank also said that ‘Chinese domestic steel demand remains muted while steel inventories are high.’

‘However, the 2020 steel production target remains unchanged and larger blast furnaces and integrated steel producers continue to operate at normal levels which indicate a positive steel demand outlook for the remainder of the year (likely 2HCY20),’ Macquarie also said.

Even still, the investment bank remains Overweight the big three miners; hitting BHP with a price target (PT) of $42.00, Rio Tinto with a PT of $106.00 and FMG with a PT of $12.40.

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Other bits and pieces

Finally and as a positive at least, in a recent Reuters article concerning the current outlook for metals, Timothy Wood-Dow, from BMO Capital, recently said:

‘We’re relatively confident that we’ve seen the bottom (for prices), but it will depend on whether we see a second (virus) break-out in China or any real deterioration in the numbers for the Western world.’

The conclusion – that likely perked the interest of those in the commodity space – was that:

‘China seems to be gearing up for a big amount of stimulus. That will be in the form of infrastructure investment, which is base-metals heavy, and will really hit the economy later in the year.’

Watch this space.

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