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Why are the BHP and Fortescue (FMG) share prices faltering again

Posted: 23 June 2022 12:19 pm
News
BHP-shares-23June_1800x1000_Finder

Shares in the top iron ore miners have lost between 3–12% over the last month, continuing to trade down this morning.

The mining sector seems to be an exception in an otherwise spread of green on the ASX on Thursday.

The top miners were among the most traded stocks, but BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) were each down more than 2.5% at the time of writing.

Why are the FMG and BHP stock prices stumbling

The trigger for the latest decline in the top iron ore miners seems to be hawkish comments by US Federal Reserve chairman Jerome Powell during the first of 2 days of semi-annual testimony to Congress.

Overnight, Powell said the US central bank could potentially lift its key interest rate by a full 1.0 percentage point at any upcoming meeting if its efforts to tame rampant inflation in the country were not successful.

"Monetary policy is famously a blunt tool and there is risk that weaker outcomes are certainly possible," Powell said in response to questions on whether lifting rates could tip the US economy into recession.

Powell's testimony immediately revived nerves among investors, who have been jittery that quicker-than-anticipated rate hikes by the US Fed and other central banks to tamp down on surging prices could drag the major economies into a recession.

Mining and energy commodities promptly dived following the comments because a global economic recession is certain to impact demand for commodities.

Uncertain outlook

CBA analysts have noted that a hard landing is certainly on the cards which could prove detrimental to the broader commodities sector.

CBA commodities analyst Vivek Dhar said in a note that the prospect of a recession in the US underscored a weakening demand environment for commodities, saying a "declining price profile across most mining and energy commodities is justified in light of a weakening demand outlook".

He expects the impact of rising energy and food prices will hurt emerging and developing market economies even more severely than advanced economies.

Those discouraging prospects were reflected in the iron ore price with futures again slipping 1.5% to US$127.02 a tonne.

The key steelmaking ingredient has now lost nearly a quarter of its value over just 8 sessions, with much of the blame attributed to a slowdown in China's economic activity thanks to a 2-month COVID lockdown in major cities and persistent downturn in its property industry.

Most analysts expect a reversal in the downtrend at some point, but the question is when. Earlier this month, research firm Wood Mackenzie affirmed an average forecast for US$130 a tonne over the second half of 2022, while ratings agency Fitch also expects an average price of US$120 a tonne for 2022.

Investors in the top ASX-listed iron ore miners are keenly watching the evolving situation because China buys nearly three-fourths of Australia's ore.

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