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Why are the BHP and RIO share prices shedding value?


Shares in the top iron ore miners have been on shaky ground over the last month, continuing their sell-off today.

The ASX benchmark indexes seem to be having a slightly better day compared to a horror last week, but it has had no bearing on the downward momentum of the top mining stocks.

At the time of writing, mining giants BHP (ASX: BHP) and Rio Tinto (ASX: RIO) had dropped more than 2% each, while smaller rival Fortescue Metals Group (ASX: FMG) had shed more than 3%.

Why are the BHP and RIO stock prices coming under pressure?

The trigger for the latest slump in shares of the big 3 miners is the slide in the benchmark iron ore price.

Benchmark spot prices fell more than 5% on Friday to a 6-month low while iron ore futures were down 2.7% to US$131.38 a tonne.

Last week was the worst for the key steel making ingredient in more than 6 months, and its price is now down nearly 20% from the recent high of US$161.25 a tonne in early May, and nearly half the US$230 peak hit in 2021.

Investors are mainly turning jittery on the demand prospects for the sector.

Part of this is due to the more than 2 months of COVID lockdowns in major cities in China that has clearly affected economic activity in the country.

But the demand outlook for the iron ore and steel sectors has also come under a cloud following a series of quicker than expected rate hikes by central banks around the world as they struggle to stamp out surging inflation. The downside is these measures could tip the global economy into a recession.

This includes a hefty 75 basis points increase in interest rates by the US Federal Reserve, a 50 basis points lift by the Reserve Bank of Australia, a 25 basis points hike by the Bank of England, a surprise 50 basis points lift by Switzerland's central bank and an anticipated lift in rates by the European Central Bank.

Slowing growth

A clear indication of the slowing demand has come with a number of steel mills in China's Tangshan opting to undertake maintenance activities and cutting production amid weak margins," said ANZ senior commodity strategist Daniel Hynes.

Analyst data showed that China's steel inventory rose by 316,700 tonnes last week to about 22.2 million tonnes, a clear reflection of sluggish demand.

The worsening situation has sparked news reports that the Chinese government is seeking to consolidate the country's iron ore imports through a new centralised buyer to counter high ore prices and reduce reliance on Australian exports. However, most experts are sceptical about the prospects for this.

Still, the top ASX-listed iron ore miners will be keenly watching these developments, because China buys nearly three-fourths of Australia's ore. Any changes would heavily impact the record profits and dividends the top miners delivered over the last year.

Analysts are still betting there won't be any drastic falls in the price of iron ore in the medium term. Research firm Wood Mackenzie has a US$130 a tonne price forecast over the second half of 2022, while ratings agency Fitch expects iron ore to average US$120 a tonne in 2022.

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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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