Why are the BHP and FMG share prices sliding today?

Posted: 10 May 2022 1:54 pm
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Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have risen 20%-35% over the last 6 months, so why are they falling today?

Iron ore miners BHP (ASX: BHP) and Fortescue Metals Group (ASX: FMG) are among the worst performers on the ASX on Tuesday, down 3.0% and 4.1% respectively.

Rival Rio Tinto (ASX: RIO) was down 4.2%, at the time of writing.

Why are the BHP and FMG stock prices trending lower?

The latest slide comes after benchmark iron ore prices tumbled 4.7% overnight to US$131.99 a tonne. Prices have been on a firm footing since February, rising all the way to US$161.25 in early April.

But the trend has been downward since then and prices have now declined more than 18% since that April peak. This has largely come about due to fears of slowing Chinese demand as the Asian giant doubles down on its COVID Zero strategy that has seen major cities like Shanghai and Beijing put in lockdown.

Virus-related lockdowns have slowed the movement of iron ore shipments to China, while there has also been great uncertainty about overall market demand, due to the rapid spread of the Omicron variant in China, which has persisted despite the restrictions.

China's Politburo last week reaffirmed its support for a lockdown-dependent approach to contain the virus, indicating restrictions will stay for the near future, and sparking concerns about the impact on the economy.

Uncertain outlook

According to latest trade data, China's iron ore imports in April fell 13% from the same period a year ago to 86.06 million tonnes. Inventories at steel mills are also believed to have increased in recent months while apparent consumption appears sluggish.

Those numbers are of major interest to the major iron ore miners because China buys nearly three-fourths of Australia's ore.

The extended run up in prices during 2021 immensely benefited the big miners and was reflected in record profits and dividend payouts. Now, investors are worried about how much impact the commodity price will have if it heads down.

In terms of prices, analysts are still sticking to their recent forecasts. Citi sees an average price of US$136 a tonne, while Fitch is predicting US$120 by the end of the year. That implies no major upside from current levels.

But this comes at a time when rising cost pressures and labour shortages in Western Australia are beginning to weigh on the sector. All 3 big miners – BHP, Rio Tinto and Fortescue Metals – have indicated higher costs in recent updates.

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