Why are the BHP and Fortescue (FMG) share prices under pressure?
Shares in the top iron ore miners have lost 8-12% over the last month, continuing this trend today.
Mining shares appear to be bucking an otherwise positive start for the Australian market in the first session of the new financial year.
The top miners were among the worst performers on the ASX in early trading, with BHP (ASX: BHP) down more than 2% while Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) slipped around 1.2% each.
Why are the BHP and FMG stock prices stumbling?
Commodities prices had seen a strong run over the first few months of 2022 but that momentum appears to have changed over the past few weeks. That has been reflected in heavy falls in the prices of base metals as well as iron ore.
Iron ore prices again stumbled overnight, edging lower to US$130 a tonne.
The key steelmaking ingredient has now lost nearly a quarter of its value over the past 3 weeks, thanks to a slowdown in China's economic activity after a 2-month COVID lockdown in major cities.
While the COVID-19 concerns may be fading away, Beijing has ruled out a heavy stimulus for its struggling economy, and has also not indicated any specific measures or timeframe for any action. It is also seeing a persistent downturn in its property industry, which is a key consumer of steel.
That is putting a cloud on growth prospects for the top ASX-listed iron ore miners because China buys nearly three-fourths of Australia's ore, and weakening demand could dampen earnings outlook for the sector.
Sentiment in the miners is also being impacted by the broader commodities selloff in recent weeks that has been triggered by concerns that aggressive rate increases by central banks are set to push the global economy into a recession.
US Federal Reserve chairman Jerome Powell has been steadfast on the need to bring down raging inflation, even at the risk of pushing the country's economy into negative growth. Should the world's largest economy slip into a recession, the effects will likely be felt across much of the globe.
It will also certainly impact demand for commodities, including iron ore.
Most analysts are not forecasting a dramatic drop in prices anytime soon but the outlook remains uncertain.
Last month, research firm Wood Mackenzie affirmed a forecast for US$130 a tonne average price for iron ore over the second half of 2022. Ratings agency Fitch also expects an average price of US$120 a tonne for 2022.
On the other hand, CBA analysts believe a hard landing is certainly on the cards which could prove detrimental to the broader commodities sector. Given the growing prospects of a recession in the US, they expect declining prices across most mining and energy commodities are "justified in light of a weakening demand outlook".
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