Rio Tinto, FMG and BHP prove volatile as iron ore remains elevated

Volatility, subjectivity and free markets

In recent times, some market commentators have started to suggest that markets are no longer ‘working’ correctly. As if markets, free as they ought to be, were ever supposed to operate in a particular fashion to begin with.

The truth is markets are operating as they always have: participants are responding to new points of data and news constantly, weighing up their consequences and making investment decisions accordingly.

Given the dour and near impossible-to-predict economic fallout from the spread of the coronavirus (Covid-19) however, it really should come as little surprise that the decisions from these market participants are overwhelmingly negative ones.

BHP, Rio Tinto and FMG share prices in focus

Interestingly though, iron ore prices remain elevated amongst this chaos and panic, with the 62% Fe Fines spot price still hovering around the US$90 per tonne mark. In saying that, Australia’s mainstay iron ore miners (which export significant amounts of the commodity on a global level) have continued, like other equities, to trade in a volatile manner.

For example, as the broader Australian market continues to notch up declines, seemingly on repeat, the likes of Fortescue Metals Group (ASX: FMG) and Rio Tinto (ASX: RIO) have actually seen their share prices trend up!

By the afternoon session, FMG gained 5.80% during the day, while the RIO share price eked out a gain of just 0.038%.

BHP Group (ASX: BHP) – which unlike the other two mining giants bears moderate exposure to oil prices through its petroleum division, nonetheless saw its share price rise, finishing out the day up a modest 0.74%.

Though trading positively today, the below table, showing the big three’s monthly share price performance, illustrates the impact of the recent coronavirus-led market volatility:

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Iron ore prices: the outlook

Looking at what is keeping iron ore prices afloat, the Financial Times (FT) recently wrote that:

‘Fears of over-supply are being held in check by an expectation that Beijing will counter the viral outbreak with aggressive economic stimulus. If policymakers do go all out, which seems a fair bet based on China’s record, iron ore could hold up.’

Mind you, the FT did warn that should such a stimulus package fail to materialise:

‘Prices could be hit hard.’

In addition to those points, though the Department of Industry, Science, Energy and Resources note that increased supply from Brazil could put downward pressure on iron ore prices; like the FT, it was pointed out that:

‘Further disruptions among major producers, unexpected delays in restoring production, or additional Chinese stimulus measures could each put countervailing upward pressure on prices over the next year.’

The Department of Industry is forecasting that iron ore prices will average US$78 per tonne – on an FOB basis – during CY20.

Other data points at a glance

Finally, turning to yesterday's market data from the Metals Market Index (MMi), it was noted for the week ending 13 March, steel inventories in China rose 2.00% to 33.88 million tonnes, while iron ore inventories at Chinese ports fell by 0.36% to 110.17 million tonnes.

Furthermore, as the MMi commented:

‘SMM estimates that there were 90 vessels carrying 12.01 million mt of iron ore arrived at major Chinese ports during March 8-14, up 400,000 mt from the week ended March 7 and up 1.6 million mt from the same period a year earlier.’

‘During the same period, iron ore deliveries leaving Australian ports fell 1.37 million mt on the week to 15.76 million mt, but the proportion of shipments to China edged higher from the previous week.’