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Why are the BHP and Fortescue Metals share prices stumbling?

Posted: 10 June 2022 12:49 pm
News
BHP-shares-10june22_1800x1000_Finder

Shares in the top iron ore miners have climbed 19-29% over the last 6 months, so why are they stumbling today?

A slide in shares of the iron ore majors is among the key reasons for the decline of the ASX benchmark indexes on Friday.

At the time of writing, Fortescue Metals Group (ASX: FMG) was down nearly 5% at $20.49, while larger rivals BHP (ASX: BHP) and Rio Tinto (ASX: RIO) had slipped 2% and 3% respectively.

Why are the FMG, RIO and BHP stock prices under pressure?

Shares in the top miners have seen a strong run over the last few weeks, with momentum coming after China announced that Shanghai had reopened after 2 months of COVID lockdowns, sparking hopes for a rebound in iron ore demand.

But the iron ore price has not been able to sustain the high levels, and on Wednesday snapped the upward momentum, cracking under pressure overnight to slip 1.4% to US$143.82 a tonne.

The latest trigger is worry about the sustainability of the price of the key raw material because of the squeeze on profit margins at Chinese steel mills.

China’s crude steel production fell in 2021 for the first time in 6 years. While the target output was lower this year, it will probably fall further due to the 2-month lockdown that hit demand across the major consumption sectors.

Meanwhile, China’s appetite for many key commodities has remained subdued due to a combination of lockdowns continuing in other major cities and surging international prices.

According to the latest customs data, coal and gas shipments continued to languish in May, while copper imports have also stayed low. This likely signals a slowing down in the world’s second-biggest economy that could hurt demand over the medium term.

Cloudy outlook

The top ASX-listed iron ore miners would be keenly watching these economic indicators because China buys nearly three-fourths of Australia’s ore.

Companies and investors alike are also carefully watching for signals from the major central banks.

US markets overnight tumbled because of fears that the US Federal Reserve will raise interest rates more aggressively than previously expected.

Investors are already spooked after the European Central Bank said it was preparing to hike interest rates next month for the first time since 2011 to curb soaring inflation.

Some are predicting a recession by the second half of 2023 after the World Bank this week cut the global economic growth forecast.

That could risk a slowdown for the commodities market and would have a direct impact on the record profits and dividends that the top miners delivered, thanks to the extended run up in prices during 2021.

Meanwhile, Australian miners are also grappling with rising cost pressures and labour shortages. Macquarie analysts have estimated that rising diesel prices have a negative impact on the large scale iron ore operations of BHP, RIO and Fortescue Metals.

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