Why the BHP and FMG share price is being battered today
Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals are still up 10-20% over the past 12 months.
ASX mining investors could be spending their weekend on tenterhooks, with sector stocks among the worst performing on the ASX on Friday. Shares in the big iron ore miners BHP (ASX: BHP) and Rio Tinto (ASX: RIO) were down 2.5% each, while Fortescue Metals Group (ASX: FMG) plummeted more than 7%. Even smaller player Mineral Resources (ASX: MIN) has felt the impact, sliding 6.5%.
What is behind the drop in the BHP and FMG stock prices?
Overnight, iron ore prices recorded a fresh plunge and are now perilously close to returning to double-digits. Spot prices for benchmark 62% fines dived another 7.7% to US$107.21 a tonne.
The latest decline came after China reported a drop in the country’s steel production in August. It produced 83.24 million tonnes of crude steel in August, a 13.2% drop from a year ago, according to data released by China’s National Bureau of Statistics as the country curbed steel industry output to cut emissions.
Spot iron ore prices have now dropped more than 55% from their peak of US$237 a tonne in May. Prices of the steel-making ingredient largely traded above US$200 a tonne between April and August due to a spike in demand in China and global supply constraints.
The extended run up in prices has immensely benefited the big miners and was reflected in record profits for BHP, Rio Tinto and Fortescue this year. It also directly contributed to their dividend payouts ballooning during the August earnings season.
Downgrades on the horizon
That dream run seems to have definitely come to an end. But concerningly for investors, the correction in iron ore prices has played out faster than expected. Analysts had expected the decline to be much more gradual. Even federal government estimates had indicated that iron ore prices would ease over the second half of 2021, but would stay above US$100 a tonne until late-2022.
“This reflects a sharper than expected slowdown in property activity in China thanks to tightening measures/Evergrande risk of default impacting confidence,” analysts at UBS said in a note on Friday.
UBS analysts have now downgraded their iron ore price forecasts, with the expectation that the iron ore market will swing into surplus in the second half of 2021, and prices falling below US$100 a tonne over the next few months, before averaging US$89 a tonne in CY22.
UBS also downgraded Fortescue to a "Sell" from "Neutral", and cut its price target on the stock to $15 a share from $18 a share. It also cut Rio to "Sell" with a price target of $86 a share. Investors will now be watching for a reversal of the share prices of the 3 iron ore miners, which hit their 52-week peaks in recent months.
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