Why BHP, Rio and FMG share prices may have peaked – for now
Shares in mining giants BHP, Rio Tinto and Fortescue Metals have climbed between 35% and 60% in the last 12 months.
The recent run-up in the benchmark ASX indices has in part been on the back of the steady solid gains by the market favourite, iron ore miners. But that upward journey could be easing.
On Wednesday, shares in the country’s three biggest iron ore miners were trading weaker, with BHP (ASX: BHP) and Rio Tinto (ASX: RIO) slipping around 1.8% each to $46.67 and $119.33 respectively while Fortescue Metals Group (ASX: FMG) had lost 1% at $21.49.
Why are BHP, Rio and FMG stock prices slipping?
The miners have been boosted by a sharp run-up in iron ore prices in the last two months. But investors now believe that the steady run is coming to an end, and many are looking to book profits.
On Tuesday, iron ore futures on China’s commodities exchanges closed 1.8% higher at US$191.65 a tonne. However, this is far below the record US$233 a tonne it hit barely a week earlier.
Alarmed at the run-up in prices that is costing valuable foreign exchange and lifting prices for local consumers, Chinese authorities are stepping up their rhetoric on high commodity prices.
Over the weekend, authorities have warned key government departments and commodity businesses against market manipulation and said there would be “zero tolerance” to irregular trading or price gouging, according to a statement by the country’s National Development and Reform Commission.
Meanwhile, Chinese authorities raised export tariffs on some steel products and cut import tariffs on scrap metal in an effort to put downward pressure on iron ore prices. Commodity exchanges have also raised margin requirements and trading fees for iron futures contracts.
While these measures are expected to cool down prices in the short term, demand for Australian iron ore is expected to remain steady in the longer term.
Steel production in the world’s second-largest economy is continuing to grow, hitting a record 97.9 million tonnes in April. At the same time, mining and port disruptions in Brazil are also limiting global supplies of iron ore.
Even before the current spike, BHP and Rio had lifted their profitability by around 20% from a year ago, while Fortescue posted a 66% jump in its half-year profits in February, helping ramp up dividend payouts.
Still, prices are expected to ease to more reasonable levels around the US$180 a tonne level, which could cut short the super-profits the big miners have been earning in recent weeks.
That trend is already being reflected in the share prices, with all three companies losing roughly 5% of their market value in the last two weeks. Investors are waiting to see how much further easing is likely before confidence returns.
Considering buying mining shares?
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