Macro Intelligence: BHP, Rio Tinto, and Fortescue stocks face pressure as China demand weakens

Article written by Juliette Saly (ausbiz)

Spotlight on iron ore

In this week’s edition of IG Macro Intelligence, we take a look at the recent slump in iron ore and what it means for BHP (ASX: BHP), Rio Tinto (ASX: RIO), and Fortescue (ASX: FMG).

That sinking feeling

Iron ore has tumbled below US$90 a tonne for the first time since 2022, as a slump in demand from the biggest buyer, China, drives losses. China’s steel crisis has sent iron ore prices plunging by more than a third since the beginning of the year, and many analysts forecast worse to come.

Iron ore price trend: September 2022 to September 2024

Morningstar’s Lochlan Holloway told Ausbiz that they see the price of the commodity falling to US$70 a tonne mid-cycle.

In China, the former People's Bank of China (PBoC) Governor Yi Gang has indicated the nation should focus on ending deflationary pressures, a sign that falling prices and weakening steel consumption are threatening China’s growth outlook.

Bloomberg reports that China Baowu, the world’s biggest steel producer, is forecasting that the industry could face a bigger downturn than those witnessed in 2008 and 2015.

Digging deep

The fall in iron ore prices is painful for miners down under.

Rio Tinto relies on iron ore for 73% of its EBITDA, while Fortescue is almost entirely dependent on the commodity. BHP's diversification into copper with the $6.4 billion acquisition of Australia’s OZ Minerals means iron ore now accounts for around 65% of its earnings.

The fall in iron ore prices has seen Australia’s materials sector fall to its lowest levels since late 2022, losing a fifth of its value so far this year.

BHP and Rio shares have also lost a fifth of their value in 2024, while Fortescue is down more than 45%.

S&P/ASX 200 market summary

Fortescue's struggles and dividends

Fortescue shares hit a 22-month low in early September when the miner traded ex-dividend, and multiple indicators suggest the stock is in a long-term bearish trend. However, its strong dividend payout of $0.89 per share was seen as a positive by the market.

Fortescue maintained its dividend payout at 70% for FY24, at the top end of its 50-80% target range.

BHP paid out total dividends for the financial year of $7.4 billion, 15% lower than in 2023. The miner also flagged that capex is expected to rise by around $500 million to $10 billion in the 12 months to next June.

IG year-to-date chart

Fortescue's future outlook

Despite current challenges, some analysts believe Fortescue is well-positioned to weather the expected downturn in iron ore prices, thanks in part to its focus on green energy investments, which are seen as a positive driver for the company’s future.

Current rating

According to Refinitiv data, Fortescue is rated a HOLD with a price target of $18.85, indicating a potential 16% increase from its trading level on 9 September.

Broker recommendations

• Six have a SELL rating
• Eight recommend a HOLD
• Only two have a BUY recommendation.

Both Goldman Sachs and UBS recommend selling the stock. UBS has flagged concerns over the lack of transparency surrounding Fortescue’s green hydrogen and ammonia projects, with a target price of $17.30.

Fortescue price vs analyst recommendations

Looking at BHP

Analysts broadly recommend a HOLD on BHP.

• The current average target price for BHP is $46.08, offering an 18% upside from current levels, according to Refinitiv data
• Morgans has an ADD rating on BHP, with a target price of $48.30. Morgans believes investor concerns around China and global growth are the primary sources of recent selling pressure on the stock, which should moderate over time.

BHP stock performance and analyst ratings

When it comes to Rio Tinto

Analysts are significantly more bullish on Rio Tinto.

• The average price recommendation is a BUY, with a target price of $134.48, indicating a 26% gain from current levels
• Of the 15 analysts polled by Reuters, none have a SELL rating on Rio. Three have a strong BUY, eight have a BUY, and four have a HOLD recommendation.

However, technical indicators suggest Rio Tinto shares are in a long-term bearish trend, implying that some investors may see little value in holding the stock at this time.

Rio Tinto stock performance and analyst ratings