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Cameron England

Iron ore strong but challenges ahead, broker warns

Cameron England
On the iron ore price front. Morgans says benchmark prices remain ’comfortably north’ of consensus expectations at $US140-$US150 per tonne.
On the iron ore price front. Morgans says benchmark prices remain ’comfortably north’ of consensus expectations at $US140-$US150 per tonne.

The iron ore price is “still in good shape’’ but could face headwinds in the short term from reduced steel mill profitability, pandemic interruptions to logistics and better volumes coming out of Western Australia and Brazil, broker Morgans says.

But the spectre of Covid-19 interruptions hangs over the WA mining sector, and while none of the bigger iron ore minors have yet made adjustments to production expectations, UBS says increased Covid-related absenteeism could see disruption to the state’s numerous mining activities.

“Iron ore poses greatest risk to WA supply disruption, (even though) none of the majors have adjusted guidance yet. We continue to monitor real-time shipping data as the best insight as to how the iron ore producers are faring,’’ the broker says.

“Covid spread in WA’s mining sector is likely to impact via worker absenteeism of both positive cases and their close contacts, though the current high-price environment provides a welcome buffer,’’ UBS says, referring to state government projections, that the pandemic peak is probably still “weeks away’’.

Gold miner Westgold last week said it had lost 3860 hours or 320 front line operational shifts within about 30 days, which would knock 3-4 per cent off its production this quarter.

On the iron ore price front. Morgans says benchmark prices remain “comfortably north’’ of consensus expectations at $US140-$US150 per tonne.

“While we see some short-term headwinds, we do not see them as enough to dislodge iron ore prices from recent ranges,’’ Morgans says.

“We base this on the gradual improvements in stability to China’s property and financial markets, which is likely to see Beijing shift its focus back towards stimulating some growth.

“Steel-intensive infrastructure projects and property construction activity have been popular levers for Beijing in encouraging growth in the past and likely to feature again in the second half of 2022.’’

Macquarie says sentiment remains positive for steel and iron ore, “as demand started to pick up following the end of the weak season, led by the infrastructure sector again while the machinery sector also improved.’’

“Industry participants’ sentiment in the near-term steel and iron ore market remains positive this month … led by steel mills, while iron ore traders are still less bullish. However, compared with (the) previous month, sentiment has weakened,’’ Macquarie says in a note to clients.

Macquarie has an outperform rating on BHP, Rio Tinto and a neutral rating on Fortescue Metals. Morgans also prefers BHP to Fortescue, upgrading its rating to “add” while it has a “hold’’ on Fortescue. “The reason we lack conviction in Fortescue is not related to its base business, or its ESG strategy, but is more on what we see as unrealistic consensus expectations supporting current market-implied valuations.’’ Morgans says.

Citi says the conflict between Russia and Ukraine meant the risk to iron ore forecasts was to the upside. “Russia/Ukraine are likely to have a material impact on the global iron ore market given that together they have significant iron ore and pellet exports,’’ Citi says.

“Due to capacity utilisation being maxed out, reduction of these volumes gives little room for production to increase elsewhere. Now CY22 looks to be heading for a sharply lower seaborne iron ore surplus.”

Cameron England
Cameron EnglandBusiness editor

Cameron England has been reporting on business for more than 18 years with a focus on corporate wrongdoing, the wine sector, oil and gas, mining and technology. He is a graduate of the Australian Institute of Company Directors' Company Directors Course and has a keen interest in corporate governance. When he's not writing about business, he's likely to be found trail running in the Adelaide Hills and further afield.

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Original URL: https://www.theaustralian.com.au/business/dataroom/iron-ore-strong-but-challenges-ahead-broker-warns/news-story/b35d2442c4804c2259fc4a6f6bb88cdb