Iron ore miners Rio, BHP to stay buoyant as Fortescue overcomes speed bumps
Aussie commodity producers will be rallying for at least the next six months, according to latest market forecasts, as Fortescue works to resume its Pilbara rail operations.
The strong outperformance of iron ore majors in 2023 is likely to run for at least the next six months with China’s steel production at “robust levels and expected to move higher”, analysts at Citi say.
While slowing global growth is expected to be a headwind for metals this year, the momentum underpinning China’s steel build-up and potential higher than expected earnings are strong tailwinds for the sector.
It comes as China’s port inventories of iron ore are struggling to recover given ongoing supply-side tightness.
Citi’s research head Paul McTaggart said the broker is looking for a reversal in iron ore/metals performance – but not until well into the second half of this year.
“In addition, consensus estimates for iron ore prices in Q4 CY23 and 1H CY24 look too low, so earnings momentum for the iron ore exposures is expected to remain positive in the first months of CY24.”
On Wednesday, iron ore futures on the Singapore exchange were stronger at around $US142.55 per tonne – close to its 21-month high of $US143 a tonne a day earlier.
These prices are still higher than first-half consensus iron ore price forecast of $US108/tonne and Citi’s estimate of $US125 per tonne.
That milestone on Tuesday triggered record closing prices for Rio Tinto at $136.57 and Fortescue at $29.39.
Both are tracking losses on Wednesday afternoon – in line with the overall ASX 200 slump of more than 1 per cent. Rio is down near $134.89 and Fortescue near $28.99.
On Wednesday, Fortescue confirmed it is “on target for normal operations to resume today” in WA’s Pilbara region after a derailment on Saturday. No one was injured in the incident that involved multiple iron ore cars derailed about 150 kilometres south of Port Hedland. The incident did not impact December or first-half shipped tonnes, but it’s not clear if January exports are affected.
In its report, Citi said running spot commodity prices of $US140/tonne through its models would see earnings upgrades of 8 per cent for Fortescue in FY24 and 60 per cent in FY25.
Citi has a sell rating on Fortescue, although recent iron ore price moves and the likelihood of consensus earnings upgrades “pose risks” to its view.
BHP would see a 2 per cent uplift in FY24 and 18 per cent gain in FY25, with Rio’s earnings boosted by 9 per cent in 2024 (calendar year) and 21 per cent in 2025.
Citi retained its buy rating on Rio Tinto and left BHP at neutral.
The broker expects “the stringent monetary medicine that central banks have administered” along with the slowing of consumer demand for services will loosen labour markets and impact economic growth.
It expects global growth this year to retreating to 1.9 per cent before a 2.5 per cent rebound in 2025.
For China, Citi expects GDP growth of 4.6 per cent with steel production forecast to grow 1.9 per cent.