BHP, Rio Tinto and FMG share prices: what’s the iron ore outlook?

BHP, Rio Tinto and FMG share prices: catalysts

Spot iron ore prices recently hit their highest levels since October 10, reaching US$93.80 per tonne this Monday, according to Bloomberg.

Fortescue Metals Group (ASX: FMG) – Australia’s premier pure-play iron ore miner recently hit all-time-highs, with its share price rising to $10.40.

BHP (ASX: BHP) and Rio Tinto (ASX: RIO), though not exhibiting FMG’s overt bullishness, have also seen their share prices trend positively in-step with the recent recovery of iron ore prices.

But – and it is a large but – one is left wondering at this point: how much longer can the music last?

BHP and Rio Tinto have remainined focused on their value over volume philosophy. Broader macro forces have not dislodged that. Yet the fact remains: lower iron ore prices would mean likely lower profits for the big three Australian miners.

For example and as we wrote previously:

‘In the second half of 2019 for example, the company’s iron ore segment accounted for 48% of BHP’s earnings (EBITDA) – up from 41% during the first-half of 2019.’

Rio Tinto’s earnings are even more connected to the gyrations of the iron ore market, mind you. In H1 FY19 Rio reported that its iron ore segment contributed US$7,552 million to the company's underlying earnings (EBITDA) – out of the US$10,250 million in total underlying earnings (EBITDA).

And obviously, Fortescue is the most exposed to fluctuations in the iron ore market, given that 100% of its operations are focused on iron ore. It's interesting then to note that FMG's share price remains up 151% YTD; iron ore prices by comparison are only up 33% YTD.

Practise trading Australian resource stocks like FMG with an IG demo account now

The iron ore price outlook

Indeed, though iron ore prices have recently rebounded, NAB is of the opinion that the price of iron ore is poised to decline – by as much as 26% from current price levels – during the next calendar year.

NAB posits that the recent price rebound ‘has been attributed to rising steel prices and expectations of infrastructure supported growth in China in 2020.’

However, this rebound is likely to come unstuck thanks to, ‘weaker iron ore demand, due to Chinese steel capacity closures over the northern winter, [which] should begin to weigh on prices in the short term.’

Specifically, NAB expects iron ore prices to decline every quarter during CY20. Here the bank predicts iron ore will hit US$79 per tonne in Q1, US$76 in Q2, US$72 in Q3 and $68 in Q4.

Others, like Daniel Hynes, a Senior Commodity Strategist at ANZ, recently also expressed a dour view on the iron ore market.

‘The upside does look limited from here, though. There’s not much sign of any meaningful pickup in demand over the longer term,' said Mr Hynes.