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Iron ore rebounds but where to next?

Nicki Bourlioufas  |  18 Nov 2016Text size  Decrease  Increase  |  

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Recent action in bulk commodities markets has been speculative and the price gains aren't likely to be sustainable, analysts say.

 

The outlook for Australian miners has improved dramatically in recent weeks as iron ore and coal price have jumped, taking the share prices of the big miners higher, buoyed by the unexpected US election outcome.

But analysts aren't so confident the rally will be sustained over the long term.

The price of iron ore struck almost US$80 a tonne this month, almost doubling from where it was in January at around US$40 a tonne. The coal price too has shot up this year and made even greater gains.

Both commodities, key ingredients in steel making, were boosted by the US election outcome, with president-elect Donald Trump having committed to a $1-trillion infrastructure investment plan over 10 years as a key priority.

While iron ore prices have since slipped back, the recent action in markets has been speculative and the price gains aren't likely to be sustainable, analysts say.

"Contrary to the market's behaviour and the comments of some of the miners, we don't think this signals a fundamental change to the long-term outlook," says Mathew Hodge, Morningstar's sector head of basic materials and energy.

"Investors and speculators are guessing what Trump will do but it's very hard to say at this stage, and his impact on global commodity markets is limited."

In China, the boost to investment by state-operated enterprises will not counter a slowdown in China's urbanisation and the nation's huge debt burden remains, both of which will keep a check on economic growth and steel demand.

"We've already begun to see urbanisation slow amid lower economic growth [in China]. The growth in the total urban population has averaged 18 million over the past three years, down from 22 million in the three years before that," says Hodge.

"Slowing urbanisation will impact the demand for commodities as there will be less demand for new housing and associated infrastructure.

"We expect a modest slowing in the rate at which steel is added to the economy, which implies falling demand for steel ... We're also starting to see supply respond as well--mine restarts such as Collinsville and increased production of semi-soft coking coal in light of the price rise."

Indeed, exports of iron ore from Port Hedland, the world's largest iron ore loading terminal, are now sitting at close to record levels. Figures from the Pilbara Ports Authority reveal a total of 41.6 million tonnes of ore were shipped from the port in October 2016, 14 per cent higher than a year earlier.

In cumulative terms, iron ore exports soared to 469 million tonnes over the year to 31 October, the largest total on record.

Analysts too at NAB are warning that any iron ore rebound will likely be limited.

"The short-term boost to profitability should not be allowed to overshadow the significant long-term challenges that China's steel industry needs to address ... Expectations that China's steel consumption will continue to decline in coming years will be a major constraint on iron ore demand, while sub-trend economic growth elsewhere provides little opportunity for China's declines to be offset," the bank wrote in a research note.

Yet, it must be said the times are better for shareholders, who have benefited from the bounce, which the big miners have talked up.

BHP Billiton (ASX: BHP) CEO Andrew Mackenzie recently indicated the commodities downturn is nearing an end.

"We have seen early signs of markets rebalancing. Fundamentals suggest both oil and gas markets will improve over the next 12 to 18 months. Iron ore and metallurgical coal prices have been stronger than expected, although we continue to expect supply to grow more quickly than demand in the near term," Mackenzie recently said in a production report.

Fortescue Metals Group (ASX: FMG) chairman Andrew Forrest has also speculated that the bottom of the commodities downturn is past us. That company's share price shot up to as high as $6.38 in November, up from as low as $1.44 in January this year.

That has been a spectacular turnaround for the miner, whose share price is up over 200 per cent this year, easily outperforming the gains of the bigger miners BHP (up around 35 per cent) to around $24 from as low as $14 in January.

Rio Tinto (ASX: RIO) too has jumped almost 30 per cent to around $57 from as low as $36.53 in January. For those that bought in low, the gains have been impressive.

More from Morningstar

• Fears of a Trump dump in tech stocks are overdone

• Are infrastructure stocks a good buy right now?

 

Nicki Bourlioufas is a Morningstar contributor.

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