Why Macquarie just boosted the FMG, BHP and RIO earnings outlook

'The upgrades to our iron ore price forecasts have transformed the earnings outlook for the producers.'

Iron ore prices in focus

Despite a pandemic which temporarily decimated the country’s economy and employment market, calamitous equity market declines, and a still-distorted property market, iron ore has continued to be a consistent centre piece of Australia’s economy.

Illustrating that point of dominance: iron ore export earnings passed $100 billion in 2019-20 and were most recently forecast to pass $136 billion in 2020-21, according to the Department of Industry, Science, Energy and Resources.

In fact so furious were the price swings of the commodity during the first half of 2021, that the Chinese Iron and Steel Association implored regulators to step in, arguing that speculation has seeped into iron ore markets.

Regulators haven’t stepped in and iron ore prices have continued to surge, with iron ore spot prices last trading above US$210 per tonne.

Free markets can be annoying sometimes.

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In an upgrade cycle

Analysts from Macquarie’s commodity strategy team – who have long been bullish on the commodity and the stocks beholden to it – today bumped up their price forecast for iron ore. Here it was argued that:

‘A step change in Chinese demand, combined with a lack of expansions, largely from the major producers, is now expected to result in more high-cost supply being required in the medium to long term to balance the iron ore market than we had previously anticipated.’

They said the expectation were now for the commodity to finish the calendar year at US$158 per tonne (representing a 20% upward revision on previous forecasts). They also bumped up their CY22 and CY23 iron ore price forecasts, to US$120 per tonne and US$95 per tonne, respectively.

With iron ore expected to stay higher for longer, the broker also increased their earnings and share price forecasts for Australia’s big three miners – BHP Group (ticker: BHP), Rio Tinto (ticker: RIO) and Fortescue Metals Group (ticker: FMG).

Of the big three miners, FMG got the biggest price target revision, up 17% to $27 per share; followed by RIO, now at $157 per share, and lastly BHP, at $61 per share.

Earnings across FY21 to FY26 were also raised between the big three: Approximately 30% for BHP, and approximately 45% for both RIO and FMG.

‘The upgrades to our iron ore price forecasts have transformed the earnings outlook for the producers. We continue to favour RIO over BHP and FMG, although the gap has narrowed, with all three stocks trading on similar free cash flow yields for FY22,’ Macquarie analysts said.

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