FMG sell-off continues, UBS sees further downside

Iron ore stocks face selling pressure

Fortescue Metals Group – Australia's largest pure play miner – faced heavy selling pressure on Friday, as iron ore prices continued to decline.

The miner saw its stock crunched by investors, plunging 11.01% to $15.36 per share by the afternoon session, as commodity markets continued to freefall.

Since peaking at US$233 per tonne in May, iron ore prices have declined at a rapid click, hitting $106.50 per tonne during the early parts of the Friday session. Those levels imply a peak to trough decline of 55% – a staggering fall from grace for Australia’s arguably most important export.

Rio Tinto and BHP Group – also experienced pronounced price declines on Friday, falling 4.01% and 3.32%, by the afternoon session, respectively.

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Analyst viewpoints

This comes as Chinese iron ore inventory levels surge, steel prices rally, and steel inventories decline.

For the week ending September 10, iron ore inventories at Chinese ports stood at 129.62 million tonnes, an increase of 5.77%; while steel inventory in China stood at 16.89 million tonnes, representing a decline of 3.42%.

According to MMI Market Commentary:

'Some traders told SMM, they have little interests in purchasing at the moment due to the expectation of declining iron ore demands. Meanwhile, they also performed to be relatively pessimistic on steel mills' restocking before the upcoming Mid-Autumn Festival and National Day holidays. Some steel mills still see bearish of the iron ore prices in the near future.'

Amid these commodity declines, analysts from UBS today lowered their rating on FMG from Neutral to Sell, while assigning the large-cap miner a $15.00 price target.

‘The correction in iron ore prices has played out faster than expected. Prices have fallen more than 50% since peaking in mid-May.’

Those weaker prices, according to the investment bank:

‘Reflects a sharper than expected slowdown in property activity in China thanks to tightening measures/Evergrande risk of default impacting confidence. We have downgraded our iron ore price forecasts. We expect the iron ore market to swing into surplus in 2H21, prices to fall below $100/t over the next few months.’

UBS also has a Sell rating on Rio Tinto.

In contrast, analysts from Macquarie this week reiterated their bullish view of Australia’s iron ore complex, maintaining Outperform ratings for FMG, Rio Tinto and BHP Group.

‘We remain positive on stocks with iron-ore exposure due to strong cash flow yields and earnings upgrade momentum,’ the investment bank said in a note.