Why are the FMG and RIO share prices trailing today?

Posted: 7 December 2021 1:20 pm
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Shares in iron ore miners Rio Tinto and Fortescue Metals have lost more than 20% of their value over the past 6 months and today was no different.

Iron ore miners are proving to be a drag on the overall ASX indices on Tuesday despite the steel making commodity recording a slight lift in prices overnight.

Shares in Fortescue Metals Group (ASX: FMG) were down 1.2% at $16.95 at the time of writing, while rival Rio Tinto (ASX: RIO) lost nearly 1% at $93.

What is affecting the FMG and RIO stock prices?

Prices for benchmark 62% fines iron ore product traded 1.9% higher yesterday to US$100.40 per tonne, but sentiment in the sector has been shaky for a number of reasons.

China’s demand for steel, and consequently iron ore, is heavily influenced by its massive property sector.

Iron is the main component of rebar used to support the massive concrete construction, while the girders for such buildings are made of steel.

But the debt crisis surrounding its property sector has weighed heavily on the economy, and the beleaguered property giant Evergrande Group was back in the news this week, saying there is no guarantee it would have enough funds to meet debt repayments.

As a result, Wall Street bank JP Morgan has already cut its forecasts for iron ore based on subdued demand from China, the world’s largest consumer of both iron and steel.

It expects the property hangover to weigh on iron ore in the next 2 years, with its price forecast for 2022 down to US$92 a tonne from $105 previously, and down to US$90 per tonne in 2023, from US$100.

“We expect weaker downstream steel demand to be compounded by a regime-shift that is imposing greater regulatory control over the property sector and emissions-intensive industries,” it said in a note on Monday.

Downgrades

JP Morgan has also cut its price target on Rio Tinto’s ASX-listed shares to $102 a share from $113 previously, while downgrading the stock to "neutral" from "overweight".

Fortescue Metals suffered a similar downgrade, with the analysts cutting its price target to $20 a share from $22 earlier.

Earlier this month, analysts at Citi also downgraded FMG to "neutral" from "buy", with a price target of $18 a share.

It comes at a time when China’s economy has felt the impact of COVID-19 as well as debt crises in various sectors.

IMF managing director Kristalina Georgieva this week noted that China’s growth momentum has been slowing visibly.

The global body in October lowered its forecasts for China’s growth to 8% in 2021 and 5.6% in 2022, mainly due to lower public spending as China faces the fallout from real estate weakness and shocks from surging coal prices and shortages.

That is indeed being reflected in the price of the Australian iron ore miners, with shares in both Rio Tinto and Fortescue Metals both down by around 23% over the past 6 months.

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