Why are the BHP and FMG share prices slipping again today?
Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals are still up 10-20% over the past 12 months.
In early trading on Tuesday, 4 out of the top 5 traded shares on the ASX happen to be iron ore miners. Unfortunately, not for the right reasons. Shares in BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) are trading between 1.5-3% lower, with smaller player Mineral Resources (ASX: MIN) also feeling the impact, slipping 2.6%.
What is weighing down the BHP and FMG stock prices?
Overnight, iron ore prices plunged to their lowest level in 9 months. Spot prices for benchmark 62% fines (the iron ore powder most commonly exported to China from Australia) were down another 9.3% to US$131.50 a tonne, the lowest point since December 2020.
According to MetalBulletin, industry sources blamed the slump on Chinese authorities taking a stricter stance on steel production curbs and the start of sintering restrictions, weakening domestic demand.
The big iron ore miners have benefited from an extended run up in prices of the steel making ingredient this year, which had largely traded above US$200 a tonne between April and August due to a spike in demand in China and global supply constraints.
This directly boosted the bottom line of the miners, was reflected in record profits for BHP, Rio Tinto and Fortescue Metals and resulted in dividend payouts ballooning during the August earnings season.
But that dream run seems to have definitely come to an end, at least for now. Iron ore prices are now nearly 45% lower from their peak in May. Analysts had been warning that the elevated price levels for iron ore could not be sustained for long as it was making the steel industry uncompetitive.
Still, the decline was expected to be more gradual. Estimates from the federal government had indicated that iron ore prices were set to ease over the second half of 2021, although they are expected to stay above US$100 a tonne until late-2022.
Analysts at UBS on Tuesday said the key concern at the moment remains weak China pig iron production (which defines demand for iron ore). The investment bank’s China property team last week cut their forecast for new starts in 2021 to -9% and expect -7% in 2022.
Meanwhile, the rapid slide in prices will result in a number of investors booking profits or exiting positions in the shares of the iron ore miners. It is also likely to result in analysts having to revise their earnings estimates for these companies, which in turn could fuel further selling.
That would mean a reversal of the share prices of the 3 iron ore miners, which hit their peaks in recent weeks.
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