FMG, Rio Tinto & BHP share prices: 2020 iron ore earnings outlook

Commodity earnings outlook

The big three Australian miners have all benefited greatly from the recent rebound in commodity prices – particularly iron ore.

In CY19 the big three’s share prices all rose: BHP (+24%), Rio Tinto (+39%) and Fortescue Metals Group (+185%).

In step with that bullishness, for 2019 to 2020, resource and energy commodity export earnings are expected to hit $281 billion, according to the Department of Industry, Innovation and Science (DIIS).

Iron ore export earnings are expected to make up $84 billion of that – a significant 29% of total earnings.

Taking a broader view, overall export earnings are expected to moderate in 2020 to 2021, falling to $256 billion – with the value of iron ore exports dropping to $66 billion in that period.

Though bullish iron ore price action has pushed the big three miners up in CY19, other commodity markets remain volatilite, notes Russ Campbell, Chief Economist at the DIIS.

For example, copper prices have declined, while gold prices have rebounded. Elevated gold prices have led Mr Campbell to speculation that 'Australia may become the world's largest gold producer by the mid-2020s'

And while iron ore still accounts for a significant portion of Australia's commodity exports, it is the diversity of these exports that:

'Hedges our economy against certain swings in global conditions,’ says Mr Campbell.

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A play-by-play of the iron ore price

Though iron ore prices touched US$123 per tonne in Jul-CY19 – they have since stabilised around the US$75-95 per tonne mark. The normalisation of supply is the primary reason that iron ore prices declined from its July highs. Moreover:

'Bouts of restocking by Chinese steel mills have helped support the price as global supply steadily recovers from the impact of the fallout of a tailings dam collapse in Brazil in early 2019,’ says Mark Gibbons from the DIIS.

In step with what looks now to be the prevailing opinion: iron ore prices are expected to fall in CY20.

The DIIS expects iron ore prices to fall to an average of US$63.0 per tonne in CY20.

Mr Gibbons, for example, further noted that 'the iron ore price is forecast to decline to average US$60 a tonne (FOB Australia) by 2021, as the seaborne market gradually returns to balance.'

As we previously reported, ‘Westpac economists expect iron ore prices to end out CY20 at US$65 per tonne.’

National Australia Bank is slightly less bearish, predicting that iron ore will drop as low as $68 per tonne in Q4 of CY20.

FMG, Rio Tinto & BHP share prices: Macquarie remains resolute

It seems prevailing sentiment around iron ore prices has done little to deter Macquarie’s bullish analysts, though.

In a research report released today, Macquarie Wealth Management reiterated OUTPERFORM ratings on all of the big three Australian Miners. From yesterday’s closing prices, the investment bank continues to expect high single-digit total shareholder returns (TSR). Here Macquarie expects potential upside of +7% for BHP (ASX: BHP), +7% for Rio Tinto (ASX: RIO) and +9% for Fortescue Metals Group (ASX: FMG).

Looking at the thrust of this bullishness: Macquarie believes that still-strong iron ore prices will continue to drive earnings momentum and that generally bullish fundamentals are likely to remain intact across 2020.

At a more granular level, with a constrained supply outlook and favourable growth in Chinese steel production still expected – the investment bank is now forecasting a 30 million tonne deficient in CY20.

This should, thinks Macquarie, be conducive of holding iron ore prices above the ‘industry cost curve.’

At the time of writing the share prices of BHP, Rio Tinto and FMG all traded at five-year highs. The FMG share price in particular rose to $10.94 today.