Why are the BHP and Fortescue Metals (FMG) share prices rebounding?
Shares in the top iron ore miners have lost 19-23% over the past month but started strongly during this morning's trading.
The top miners seem to have put Wednesday's carnage behind them, at least for now. At the time of writing, BHP (ASX: BHP) shares were up 1.4%, Rio Tinto (ASX: RIO) climbed 3.4% while Fortescue Metals Group (ASX: FMG) added 2.4%.
What is helping the BHP, RIO and FMG stock prices bounce back?
The 3 top miners had slumped in the previous session amid a slide in all metal and mining stocks as fears of a global recession took hold. Rio Tinto was hit the worst, sliding 7.4%, BHP dropped 5.6% and Fortescue Metals lost 4.9%.
But investors are realising that those fears were likely overblown, at least for the moment. Commodities prices have seen a strong run over the first few months of 2022 and this week's sharp drop is likely a typical correction.
So far, earnings have also held up for the top miners and there has been no major change in guidance as iron ore remains the biggest export for the country.
In fact, some of the price spikes seen over the past few months may give a boost to company earnings in the current half year.
Most analysts are not forecasting a dramatic drop in prices from current levels. 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.
Will the gains sustain?
That is a million dollar question, because the outlook for the commodities sector remains uncertain.
Sentiment in the sector has clearly been impacted in recent weeks, triggered by concerns that aggressive rate increases by central banks are set to push the global economy into a recession. That will certainly impact demand for commodities, including iron ore.
Iron ore prices are now trading around US$110 a tonne. That means Australia's most valuable export commodity has lost a quarter of its value in just 1 month, and a third of its value over a 2-month period. That is reflective of a broader trend and prices could drop further.
On top of that is the growing threat posed by a weakening Chinese economy, our biggest market for iron ore. China's economic activity has slowed down after a 2-month COVID lockdown in major cities.
Beijing has ruled out a heavy stimulus for its struggling economy, and has also not indicated any specific measures or timeframe for any action.
There is also a persistent downturn in its property industry, which is a key consumer of steel.
As such there is now a cloud on growth prospects for the top ASX-listed iron ore miners because weakening demand in China will definitely dampen earnings outlook for the sector.
Investors are keenly watching the evolving situation.
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