Why are the BHP and RIO share prices higher?

Posted: 28 January 2022 12:07 pm
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Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have climbed 5-10% over the past month.

Mining shares are largely responsible for keeping the ASX indices in the green on Friday, with top traded shares BHP (ASX: BHP) and Rio Tinto (ASX: RIO) both climbing around 2.5% each.

Rival Fortescue Metals Group (ASX: FMG) was not far behind, up 1.8% to $19.83 at the time of writing.

Why have the BHP and RIO stock prices rebounded?

The top miners are back in the spotlight following growing worries in recent days about potential supply hurdles in Western Australia, which has prompted a lift in iron ore prices.

Prices for the benchmark 62% fines product rose as high as US$138.39 a tonne this week, according to Fastmarkets MB. That represents a more than 50% rebound since prices slipped below the US$90 level in November last year.

The latest gains come after Fortescue Metals raised concerns over labour shortages in the Pilbara because of Western Australia’s hard border to keep out the Omicron coronavirus variant. BHP and Rio Tinto have also warned of disruptions from labour shortages as Australia faces a surge of cases.

Western Australia is home to the majority of Australia's iron ore mines, which supply about 70% of the imports by China, the world's biggest buyer of the steel making ingredient.

Analysts are also worried about the threat to production in the coming cyclone season, which could be more severe than usual because of the La Nina weather phenomenon.

Wary outlook

The recent gains in the iron ore price have largely been driven by hopes about recovering demand in China on the likelihood of improved steel production after restrictions on factory activity are lifted after the Beijing 2022 Winter Olympics.

The recent gains are a welcome break from the swift drop in iron ore prices during the second half of 2021, which led to the big miners facing downgrades from analysts over concerns about the sustainability of their record profits.

Still, analysts are urging caution on the price outlook due to high inventories at Chinese ports and the cloud hanging on China’s debt-ridden property sector.

Ratings agency Fitch expects an increase in steel production in China after the Winter Olympics and Chinese New Year, but is still forecasting for the iron price to moderate to US$90 per tonne later this year.

Meanwhile, broker UBS has flagged a base case scenario of iron prices at US$85 per tonne this year, saying demand dynamics do not favour ongoing strength.

"We are cautious on iron ore prices as we expect demand to weaken year on year and supply to lift in 2022," its analysts said in a note to clients.

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