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Why are the BHP and Fortescue Metals (FMG) share prices losing ground?

Posted: 17 June 2022 12:40 pm
News
BHP-shares-17June_1800x1000_Finder

Shares in the top iron ore miners climbed 4-10% over the last month but lost ground during this morning's trading.

A slide in shares of the top miners is among the key reasons for the sharp drop in ASX benchmark indexes on Friday.

At the time of writing, each of the major miners BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) had slipped more than 3%, for the second time this week.

Why are the FMG, RIO and BHP stock prices under pressure?

Shares in the top iron ore exporters had actually seen a strong run over the last few weeks, building momentum after China finally announced a reopening of its major cities following 2 months of COVID lockdowns, sparking hopes for a rebound in iron ore demand.

Even now, iron ore prices have remained largely stable, closing little changed at US$135.04 a tonne overnight as steel mills in the world's second largest economy stock up the key raw material on hopes of improved economic activity helping in demand recovery.

However, investors have suddenly turned jittery on the outlook for the sector following a series of quicker than expected rate hikes by central banks around the world as they struggle to stamp out surging inflation.

The mammoth 75 basis points increase in interest rates by the US Federal Reserve earlier this week has now been followed by a 25-basis-point hike by the Bank of England, a surprise 50-basis-point lift by Switzerland's central bank and an anticipated lift in rates by the European Central Bank for the first time in 11 years.

The busy central banks have revived market concerns that the global economy is set to be tipped into a recession later this year or early next year.

Cloudy outlook

A global economic recession is certain to impact demand for commodities. Already, a range of base metals prices have tumbled in the last few weeks. Even iron ore prices are down from a recent peak of US$161.25 a tonne in early May, retracing about 16% from that level in just over a month.

Investors clearly haven't forgotten the commodities down cycle in 2015-16, when iron ore hit a 10-year low of US$43 a tonne and stayed well below $100 a tonne until 2018.

Despite the uncertainty, most analysts don't expect any drastic falls in the price of iron ore for the near future, largely because China's economy and demand for the raw material is a lot bigger than it was 7 years ago.

Earlier this month, research firm Wood Mackenzie forecast the iron ore price to remain around US$130 a tonne over the second half of 2022, just a small drop from the first half.

Ratings agency Fitch also revised its price forecast upwards. It now expects iron ore to average US$120 a tonne in 2022 and US$110 a tonne in 2023, thanks to Chinese demand once again picking up after its government's renewed stimulus for the infrastructure sector.

Investors in the top ASX-listed iron ore miners would be keenly watching these numbers, because China buys nearly three-fourths of Australia's ore and any changes would heavily impact the record profits and dividends that the top miners have been delivering.

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