FMG dumped as iron ore tumbles

A faster-than-expected fall in iron ore prices, which are half their peak levels, has led to a big sell-off of mining stocks and raised doubts about the government’s budget outlook.

Fortescue’s share price fell 11.3 per cent today to $15.30, compared to a peak of $26.40 only two months ago.

Investment bank UBS put a 'sell' recommendation on Fortescue shares this week after a fall in the spot iron ore price and a further revision in its price forecast.

“The correction in iron ore prices has played out faster than expected,” UBS said in a research note.

Mineral Resources was also sold heavily, down 7.2 per cent to $48.94 and well below its July peak of about $63.50.

Rio Tinto was down 4.2 per cent to $99.26 and BHP was off 3.8 per cent to $39.11.

They are Australia’s largest iron ore exporters but are insulated by their exposure to other commodities, whereas Fortescue is a pure-play iron ore stock.

The spot price of iron ore fell this week to $US118 per tonne, though its an opaque market, with some industry players quoting a benchmark price as low as $US106/t.

Either way, the price has roughly halved from its peak earlier this year.

The big fall in iron ore prices will not dent the viability of the big miners – their cash costs are less than $US20/t – but it will smash their profits.

The fall also has major implications for the state government, as every $US1/t fall in iron ore prices cuts $82 million from royalty income.

Last week’s state budget assumed the benchmark iron ore price would fall from an average of $US154.50/t in FY21 to $US121.30/t in FY22 before reverting to the long-term average of $US66/t in later years.

Shadow treasurer Steve Thomas said that if the decline continues, the budget forecast for this year is under threat effectively from day one.

He called on the premier and treasurer Mark McGowan to outline his economic and financial plans for how he intends to respond if iron ore prices continue to decline.

UBS said overnight it had cut its iron ore price forecasts by approximately 10 per cent, as it expects the market to be in surplus from the second half of 2021.

It expects the price to fall below $US100/t by the end of 2021 and average $89/t in 2022 and $US80/t in 2023.

This is well below the consensus forecast for 2022 of about $US132/t.

UBS said weaker steel production in China has driven a sharp fall in iron ore prices

It attributed this to a sharper than expected slowdown in property activity in China, thanks to tightening measures by the government and concerns surrounding the financial viability of giant apartment developer Evergrande.

“We remain cautious medium-term, as supply from the incumbents is set to lift, Guinea is set to add 100-200 million tonnes from 2025-26, and as steel scrap in China increasingly displaces iron ore demand,” UBS concluded.

The investment bank noted several other risks facing Fortescue, including further delays and cost increases at its Iron Bridge magnetite project and wider price discounts for its lower-grade ore.

It maintained a 'sell' rating on Rio and a 'neutral' rating on BHP.

AMP Capital chief economist Shane Oliver said Australia should be “alert but not alarmed” by the iron ore price fall.

“Bear in mind that the iron ore price has fallen from levels no one ever thought it would get to and is still very high and well above cost,” Mr Oliver said.

“This will dent Australia’s national income and current account surplus and add a new blow out in the Federal budget deficit.

“But against this most other commodity prices are surging – including coal and gas (our 2nd and 4th largest exports), aluminium and copper – with most commodity price indexes near past mining boom levels.

“In fact, there is good reason to believe a new commodity super cycle (ex-iron ore) has begun, which should benefit Australia.”

In this regard, UBS has lifted its metallurgical coal price forecast by 30 per cent following a recent spike in spot prices, driven by supply disruptions and the continued embargo of Australian coal into China.