Why are FMG and BHP share prices rebounding?

Posted: 21 March 2022 1:07 pm
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Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have been amongst the most heavily traded stocks reflecting a changing situation in Ukraine.

Heavyweight mining shares are among the key stocks boosting the ASX on Monday. Fortescue Metals Group (ASX: FMG) was up nearly 2% at $18.92 while BHP (ASX: BHP), Rio Tinto (ASX: RIO) were both up around 0.7% each, at the time of writing.

Why are the BHP and FMG stock prices rising?

Investors in the top miners stocks would be heaving a sigh of relief as the stocks reverse course from the 4-10% slide in recent weeks, boosted by gains on Wall Street on Friday and amid signs of progress in peace deal talks between Russia and Ukraine.

That helped benchmark iron ore prices cross US$150 a tonne for the second time in 2 weeks, again putting them at their highest level since September last year. Iron ore rose 3% to US$151.35 a tonne.

Prices of the key steelmaking ingredient are now up more than 80% since hitting a low of US$87 a tonne in November 2021, thanks to a combination of factors.

The Russia Ukraine conflict has resulted in commercial shipping in the Black Sea coming to a standstill, causing a major supply disruption. But the iron ore price has also held firm thanks to Chinese steel demand showing signs of a rebound after a collapse towards the end of last year.

Meanwhile, freight rates have subsided to normal levels, even though labour shortages and weather impacts in Australia continue to loom over the supply chain.

Improving outlook

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

Analysts had initially been concerned the recent jump in prices wasn't backed by any improvement in demand fundamentals in key market China, but that view seems to be changing swiftly.

Macquarie expects infrastructure spending to pick up after China set economic targets at the National People's Congress this month, and has also noted that the iron ore price so far in 2022 is already averaging 26% higher than the US$110 a tonne average in the December quarter.

Analysts at Citi also see an average price of US$136 a tonne in 2022, while Fitch 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 the gains will be reflected in company profitability.

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