Why have the BHP and FMG share prices paused today?

Posted: 23 December 2021 1:07 pm
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Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have recovered 10-25% of their value over the past month.

Iron ore miners BHP (ASX: BHP) and Fortescue Metals Group (ASX: FMG) are trading lower, pausing the upward momentum seen in recent weeks. At the time of writing, BHP shares were down 0.9% at $41.02 while FMG dropped 2.4% to $18.97.

Why have the BHP and FMG stock prices stumbled?

Iron ore prices have rebounded in recent weeks on renewed hopes over recovering demand for the steel-making ingredient in China. Earlier this week, prices climbed to a 2-month high of US$124 a tonne.

However, the optimism doesn’t seem to be based on conclusive evidence, and on Wednesday, prices for benchmark 62% iron ore fines dropped 2.3% to US$123.30.

Investor sentiment is being tempered by China’s rising imported iron ore stockpiles, which last week hit their highest level since mid-2018, and continuing steel production curbs expected to be enforced at least until the Beijing Winter Olympics in February.

Traders are also nervous about reports of rising COVID-19 infections in major cities and China’s focus on maintaining a zero-COVID policy by imposing mobility restrictions.

The combination of factors is all expected to bring down the country’s steel demand in the coming months, which are off-peak months when production recedes. That will definitely impact demand for Australian iron ore.

Uncertain outlook

According to data released by the World Steel Association on Wednesday, global crude steel production dropped 10% from a year ago to 143.3 million tonnes in November. However, production in top producer China tumbled 22% to 69.3 million tonnes.

China is expected to push ahead with cutting carbon emissions, while its debt-laden property sector will also weigh on steel consumption. Because the country buys about 70% of the world’s seaborne iron ore and produces half of global steel supply, analysts expect the volatility in iron ore prices to persist in 2022.

In terms of prices, UBS expects iron ore to average US$85 a tonne in 2022, while Citi sees an average price of US$96 a tonne. Capital Economics is predicting US$70 by the end of next year. That implies a significant downside from current levels.

The extended run up in prices during 2021 benefited the big miners immensely and was reflected in record profits and dividend payouts. Now, investors are worried about how much impact the commodity price will have on its way down.

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