Macro Intelligence: iron ore outlook - market impact and trends
In this week’s edition of IG Macro Intelligence, we examine the outlook for iron ore and its impact on market sentiment. Including iron ore stocks to watch on the ASX 200.
Article written by Juliette Saly (ausbiz)
Iron ore defies bearish predictions, surges to yearly highs
Iron ore prices have stayed above $100/tonne for most of the year, despite analyst expectations of a bear market. In the past week, iron ore has settled over US$135 a tonne, its highest closing level in a year. It’s been the best performing industrial metal of 2023, defying expectations it would collapse.
In August, amid depressed price action, Goldman Sachs forecast a bear market saying iron ore would trade around $90 a tonne by December. The investment firm has since done a backflip as iron ore continues to ratchet higher. Goldman Sachs has now lifted its average 2024 price forecast to $110/t, a 22% increase.
ING Research is more bullish, forecasting prices will average $120/ t next year.
Iron ore daily chart
China reliance
China is the world’s biggest buyer of iron ore, and its imports from Australia have helped our country report trade surpluses for the last six years. China’s iron ore imports were 102.74 million tons in November, up 3.4% from October and 3.9% from the same month in 2022.
China iron ore imports vs price chart
Imports have held up even when prices were falling, as Beijing looks to shore up its economy through efforts to revive the struggling property sector.
China’s property sector accounts for around 40% of iron ore demand. That strong demand, coupled with low inventory levels in China, is keeping iron ore prices elevated.
Iron ore inventories at Chinese ports are at an eight year low, according to ING Research. The analysts believe low inventories will support prices further, as mills look to restock ahead of the Lunar New Year.
China’s iron ore imports charts
Supply issues could remain volatile as markets respond to further policy measures from China, and due to strike action at BHP and a suspension of operation at a key Brazilian mine. Fortescue’s CEO told CNBC he continues to see “strong, robust demand” from China.
On the flipside, Vale’s CEO told Bloomberg China cannot control the price of iron ore. The head of the world’s second largest producer of the commodity says economics - ie supply and demand - will control prices, and has forecast a tight iron ore market in the coming years.
Still, China’s insatiable appetite for the metal is a boon for our economy. Exports driven by metal ores saw Australia’s trade surplus widen in October to $7.1 billion, despite a 1.9% decline in imports.
Buy or sell?
Iron ore stocks to watch include Fortescue, Rio Tinto, BHP, Champion Iron and Mineral Resources.
Fortescue metals group daily chart
Fortescue’s share price is up over 27% year to date, and has been trading at all-time highs above $25 a share. That’s too expensive, according to most analysts as seen in this snapshot from FNArena’s broker calls. Macquarie recently called FMG an “underperform” and has a price target of $18.20, suggesting it could fall almost 30% from current levels. Huw McKay, BHP’s chief economist, believes at $130/t iron ore is trading above
fair value.
Macquarie's sentiment indicator
BHP group limited daily chart
BHP shares are up just over 5% year to date, much less than FMG but much more than the relatively flat momentum on the ASX 200.
Still, most brokers believe “The Big Australian” belongs in every portfolio. At the top end - Macquarie has an outperform rating with a target price of $50, while at the lower end, Ord Minnett has a hold with a $41 PT.
Rio tinto daily chart
Some bank's sentiment indicators
Forecasts for Rinto are similarly strong.
Champion iron daily chart
Meanwhile Goldman Sachs tips a potential 7% upside for Champion Iron, with a 12-month price target of $8.30. Citi has a Buy with a PT of $8.70 while Macquarie rates the stock an outperform. Analysts are a little more mixed on Mineral Resources.
Analysts say iron ore prices could decline in the second half of 2024, especially if Beijing elects to cap steel output. But for now, its iron will continue to look attractive for a number of Aussie-listed iron ore mining players.
Mineral resources sentiment indicators
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