Why are the RIO and FMG share prices higher?
Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have lost 20–25% of their value over the past six months, so why are the miners turning around today?
The big mining stocks are bucking the trend today with hefty gains despite overall weakness in the market. Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) were up 1.8% and 3.2% respectively while BHP (ASX: BHP) was up 1.3%.
What is boosting the mining stock prices?
The big iron ore miners have tumbled in the past 3 months since the prices of the key steel-making ingredient have slid more than 50% from its high in May. But there has been surprising strength in iron ore prices over the past week or so, leading investors to believe there could be stability going ahead.
China's benchmark iron ore futures surged on Tuesday, hitting their 10% daily trading limit. Spot iron ore prices again rose 4% on Wednesday, lifting past the crucial US$100 level to settle at US$103.45 per tonne.
The gains follow indications that steelmakers in China are set to resume production after rigorous controls in the past few months following government orders.
China had imposed curbs on crude steel production from January–October in an effort to lower emissions and amid sluggish downstream demand.This has now left room for steel firms to raise output for the rest of the year.
China has also been looking to support its heavily indebted property sector after Evergrande managed to stave off default.
Recent news reports show bank lending to real estate developers in China rose sharply in October.
That could all help stall the faster-than-expected drop in iron ore prices and help prop up returns for the big miners, who benefited from an extended run up in prices between April and August due to a spike in Chinese demand and global supply constraints.
Estimates from the federal government had expected iron ore prices to ease over the second half of 2021, but stay above US$100 per tonne until 2022.
That may still happen at the current trajectory.
Brokerages who had rushed to downgrade estimates after iron ore prices collapsed, are taking note.
Earlier this week, analysts at Bell Potter put a $19.75 price target on shares of Fortescue Metals Group, indicating significant upside from the current level.
Investors will be hoping for more to follow.
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