Why are the BHP and FMG share prices sliding today?

Posted: 15 March 2022 12:27 pm
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Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have recovered 4-13% of their value over the last 6 months, so why are they sliding today?

Iron ore miners BHP (ASX: BHP) and Fortescue Metals Group (ASX: FMG) are among the worst performers on the ASX on Tuesday, down 3.5% and 5.8% respectively. Rival Rio Tinto (ASX: RIO) was also down 4.4%, effectively pausing the upward momentum seen in the sector in recent weeks.

Why have the BHP and FMG stock prices stumbled?

Iron ore prices had rebounded in recent weeks over concerns about supply disruptions amid the Ukraine conflict.

However, the price of the key steel making ingredient slid 6.2% overnight to US$144.90 a tonne, weighing on local stock prices.

Trading sentiment seems to be shaky on 3 accounts. Firstly, investors have turned cautious on the eve of the first rate increase by the US Federal Reserve, in what is likely to signal an upcycle in interest rates around the world. Traders are already factoring in a 25 basis points hike, but are wary of the commentary that could signal further increases, with 6 more expected this year.

The other is reports that Russia has asked China for help in its war against Ukraine, which could see a western backlash against Chinese companies.

In addition, news of growing COVID-19 lockdowns in major Chinese cities as they try to control the spread of the Omicron variant is expected to hit economic growth there. Already, Chinese stock markets have tumbled more than 5% this week.

The combination of factors is all expected to bring down the country's steel demand in coming months. That will definitely impact demand for Australian iron ore.

Uncertain outlook

The last 2 factors, in particular, are of major interest to the iron ore miners because China buys nearly three-fourths of Australia's ore.

The latest slide also comes amid broader concerns among analysts that the recent jump in prices, more than two-thirds higher from the bottom hit last November, isn't backed by any improvement in demand fundamentals in China.

In terms of prices, 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.

In addition, rising cost pressures and labour shortages in Western Australia are also beginning to weigh on the sector. All 3 big miners – BHP, Rio Tinto and Fortescue Metals – last month indicated higher material and labour costs as well as the impact of adverse weather conditions.

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.

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