Shares in Australia's big three iron ore miners have broadly stabilised today after suffering big falls in recent trading sessions, in line with a dramatic collapse in the iron ore price, which is down more than $US23 per tonne since its peak last month.
Shares in Australia's big three iron ore miners have broadly stabilised today after suffering big falls in recent trading sessions, in line with a dramatic collapse in the iron ore price, which is down more than $US23 per tonne since its peak last month.
Iron ore reached a 5.5–year high at $US123.19/t on July 3, and hovered around the $120/t mark until the start of August. Since then, prices for the commodity have been hit by escalating US-China trade war tensions and a rebound in production by Brazil's Vale.
In the first five days of August it fell from $120.02/t to $106.51/t.
Overnight, prices slumped a further $US6.17 to close trading at $US100.34/t.
The iron price over the past three months
On August 1, US President Donald Trump vowed to impose additional 10 per cent tariffs on Chinese exports from September 1.
In response, China let its yuan tumble to its weakest level in a decade and ordered state-owned companies to suspend imports of US agricultural products.
The ASX fell around 300 points over past two days on the news, its worst two-day period in 2019 by a considerable distance.
In addition to the broader stock market woes, on August 2 it was revealed that Brazil’s iron ore exports increased to 34.3 million tonnes in July.
This was a 16.6 per cent rise from the month prior, and marked its strongest monthly production result in nine months.
This was due to Vale resuming production at its largest mine in the Brazilian state of Minas Gerais, after it was granted approval by local authorities to resume some of its operations in the region.
The worlds largest iron ore producer was forced to halt a significant portion of its Brazilian operations following a tailings dam disaster at its Córrego do Feijão mine on January 25 that killed hundreds of people.
About $US19 billion was wiped from Vale’s share price the next day, and the iron ore price surged from around $US75/t to $US92/t in the week after the disaster, due to anticipated short-to-medium-term global supply shortages.
However, the recent price slump was foreshadowed by some analysts.
In April, investment bank UBS downgraded its BHP share price forecast on the back of predictions Vale will begin to regain its lost production over the next year.
“We do not see spot iron ore of approximately $US93 per tonne as being sustainable and expect prices to fall back over the next 12 months as Australian supply normalises and Brazilian supply starts to recover,” UBS said.
“We look for an average price of $US83 per tonne in 2019.”
Additionally, the WA Treasury’s latest iron ore price assessment anticipates the price returning to around $US66/t by 2020-21.
The swift change in iron ore fortunes has had a direct impact on the share prices of the biggest domestic players in Australia.
Only July 3, Rio Tinto hit its record price on the ASX of $107.05/share, Fortescue Metals Group reached an 11-year high at $9.40, and BHP reached an eight-year peak of $42.08.
However, since then, Rio’s shares have fallen around 14.6 per cent to currently trade at $91.39, Fortescue’s share price has sunk 22.5 per cent to $7.29, and BHP’s has declined 11.8 per cent to $37.10.
The bulk of these share price losses have occurred during the past fortnight.
Today, shares in FMG closed trade up 2.8 per cent, while BHP was down 0.75 per cent and Rio also lower, dipping 0.11 per cent.
However, while the overall demand for iron ore in China remains volatile, the demand for high-grade iron ore of at least 62 per cent, with lower impurities, is high, because it requires less pollution-causing beneficiation.
This is ideal for the world's most populous country, as it ramps up its efforts on environmental control.
Commonwealth Bank of Australia's commodities analyst Vivek Dhar said the increased demand for high-grade ore would be a long-term shift.
“While we expect that premium (for higher grades) to pull back slightly from current levels, we believe the broad preference for higher-grade ores is a structural change in the market,” he said.
