Why are FMG and BHP share prices pushing higher?

Posted: 4 April 2022 1:34 pm

Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have risen 10-24% so far in 2022.

Heavyweight mining shares are helping push the ASX higher on Monday.

Fortescue Metals Group (ASX: FMG) was up nearly 3% at $21.66 while BHP (ASX: BHP) added another 0.5% as it closes in on a 52-week high of $54.55, while Rio Tinto (ASX: RIO) had gained 0.7%, at the time of writing.

Why are the BHP and FMG stock prices leading?

The top miners are again in the driver's position after benchmark spot iron ore prices at Tianjin port surged 6.1% to US$159.98 a tonne with markets expecting robust restocking demand in China when COVID-19 restrictions are lifted.

Major cities in China, including financial capital Shanghai, have been under widening lockdowns as the Omicron variant spreads in the country, resulting in stalling demand but also disruptions in supplies.

That has led to a spike in iron ore prices in recent weeks, and the key steelmaking ingredient has now nearly doubled since hitting a low of US$87 a tonne in November 2021.

Traders are optimistic over prospects of government support to shore up the world's second-largest economy and biggest steel producer, and signs of a resilient industrial demand in the country are bolstering ore prices.

Resurgent price

The latest lift in prices comes despite China's key Dalian Commodity Exchange raising trading limits and margin requirements for some of its futures products, including iron ore.

In a recent note, Macquarie analysts said they expect infrastructure spending to pick up after China set economic targets at the National People's Congress last month.

The extended run up in prices during 2021 immensely benefited the big miners and was reflected in record profits and dividend payouts. Investors are now hoping the current run-up in prices will have a similar impact on the companies' profits outlook.

Analysts at Citi recently forecast an average price of US$136 a tonne for iron ore in 2022. Fitch, which expects production to rise, is predicting US$120 by the end of the year. Both had previously estimated prices to average between US$100 and US$110 a tonne, meaning a significant upside to corporate bottom lines.

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