Weakening Iron Ore Prices Hit Australian Iron Ore Miners

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Weakening Iron Ore Prices Hit Local Miners

  • Global Iron Ore prices down 33 per cent since June highs
  • Rally price of US $214 in June, down to US $138 per metric tonne
  • Expected to hit lows of US $100 per tonne by end FY22

As the decarbonisation of global industries remains a hot topic alongside trends like pandemic recovery, commodities investors have certainly kept watch for the continuing decline of iron ore prices. With spill-off effects brought about by stabilising demand for steel manufacturing in China, this perhaps marks a point in global industry which sees greener incentives driving the need for more diversified mining portfolios among Australian producers.

Global iron ore prices saw the peak of its rally in June, with prices per metric tonne falling from heights of US $214 to around US $138 at the time of writing. This presents a steep decline of about 33 per cent within just months — attributed mostly to the decreased demand for steel manufacturing in China. This spill-on effect can be traced back to the start of August, as demand stabilised among Chinese steel producers. Within its domestic market, this is correlated to the near-completion of stimulus-related construction, as well as a tapering off of new projects. Viewed as a potentially long-term downtrend, driven especially by China’s push to achieve ‘Olympic Blue’ skies for its Beijing Winter Olympics event in February, weakening iron ore prices are likely to see lows of US $130 per tonne in FY22.

Spill-On Effect a Sign of Bigger, Greener Investments to Come

This spill-on effect is expected to influence the operations of leading Australian iron ore producers such as the BHP Group, Rio Tinto, and Fortescue Metals Group Limited. While each has recently reported record production volumes in FY21, significant dips to the price of iron ore inevitably present the need for these companies to re-evaluate their production for the year ahead, and even further beyond.

Shares in BHP, Rio Tinto and Fortescue Metals are still up 10 to 20 per cent over the past 12 months, yet investors will be paying attention to how these companies might mitigate the effects of weakening iron ore prices on their overall portfolios.

Fortescue Metals reported its highest ever net profit after tax of US $10.3 billion this year — an increase of 117 per cent from FY20. This historic achievement comes as a result of shipping a record amount of iron ore to capitalise on soaring prices in the first half of 2021. However, it has reported the establishment of a future industries division, to focus on building a global green hydrogen and renewable energy portfolio.

In its HY21 results, Rio Tinto noted exceptional market conditions as a driving influence for its record financial performance. The group declared a free cash flow of US $10.2 billion and underlying earnings of US $12.2 billion for the year. Interestingly, Rio Tinto also announced strengthening its portfolio to feature a high quality Jadar lithium project — signalling its large-scale entry into the quickly growing battery materials market.

BHP reported a strong set of results for FY21, with group revenue rising 42 per cent to US $60,817 million, and underlying EBITDA gaining 69 per cent to US $37,379, driven by record production volumes from its Western Australia Iron Ore, Goonyella, and Olympic Dam sites. However, its final report describes its focus on restructuring its global organisation, an exit from its oil and gas business, and the acquisition of Noront Resources in Canada, which is recognised for its portfolio in nickel, copper, chrome, and platinum.

Caroline Wong

Caroline Wong is a Research Analyst at KOSEC – Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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