BHP, Rio Tinto and FMG shares: the Coronavirus impact examined

The Coronavirus, iron ore prices & changing market dynamics

In 2019, China imported a staggering 1.069 billion tonnes of iron ore – representing approximately 70% of global imports.

And though many were expecting that demand would remain flat in 2020 – the Coronavirus crisis has thrown things out of whack – so to speak, with industrial activity in China grinding to a halt.

Looking at how this has impacted the dynamics of the iron ore market; S&P Global yesterday wrote that iron ore prices have fallen more than 8% in the last week, ‘as expectations faded for a recovery in downstream steel demand in the second quarter while the coronavirus outbreak continues to spread beyond China.’

In saying that, according to the Metals Market Index (MMi), China port iron ore prices bounced overnight: the 62% Fe Fines port stock price rose to US$88.32 (+3.6%) per tonne, while the 65% Fe Fines port stock price bobbed up 2.1%, to US$103.89 per tonne.

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Taking a more granular look at the impact the Coronavirus has had on Chinese industrial activity, we see that Chinese steel inventories have skyrocketed while iron ore inventories have slumped, according to the MMi.

Specifically, for the week ending February 28: iron ore inventories at Chinese ports fell 1.38% – to 111.68 million tonnes; while steel inventories in China surged 8.55% higher during that period, to 31.61 million tonnes.

Finally, and looking at other market commentary, the MMi yesterday wrote that:

‘DCE iron ore futures, SGX swaps ripped higher and physical seaborne and port iron ore prices bounced. Total physical transactions rose as the markets improved.’

Looking slightly further out, it was noted that:

‘Tangshan announced a comprehensive action plan for the control of pollution from Feb 29 to March 31, 2020 […] Therefore, mill demand for iron ore in the second half of March is expected to decline.’

FMG, BHP and Rio Tinto: recent share price action

Though Australia’s big three miners – BHP, FMG and Rio Tinto all recently reported a strong set of half-yearly (and in the case of RIO yearly) results, their share prices have still come under significant pressure in recent weeks.

Indeed, the big three remain heavily leveraged to iron ore prices: BHP derived 60% of group earnings (EBITDA) from its iron ore operations in H1 FY20; Rio Tinto saw 75% of its earnings driven by its iron ore segment in FY19; and FMG of course, as a pure-play miner, was at 100%.

Unsurprisingly then, Fortescue Metals Group (ASX: FMG) is down 16% in the last month (though much of that is related to the miner going ex-dividend yesterday), BHP Group (ASX: BHP) is down 12%, and Rio Tinto (ASX: RIO) is down 10%.

Ultimately, though FMG skirted in-depth commentary on the Coronavirus as part of its recent half yearly; Rio Tinto was more explicit, saying 'we are closely monitoring the impact of the Covid-19 virus and are prepared for some short-term impacts, such as supply chain issues. Our products are currently reaching our customers.'