Iron ore price could hit $US200: Macquarie
Having just topped an all-time high, the price of Australia’s biggest export is set to reach a new threshold, analysts predict.
In a boost both for miners and Australia’s budget, iron ore could soon cross the never-seen-before price threshold of $US200 ($257.7) per tonne, as steel margins expand amid a stimulus-led global construction boom and China expands production, according to analysts at Macquarie.
In an investor note the analysts said they remained positive on Australian iron ore miners like Fortescue Metals Group, Rio Tinto, BHP, Mineral Resources and Champion Iron due to their “strong cash flow yield and earnings upgrade momentum”, putting them in the perfect position to benefit from growing demand for higher grade ore favoured by steel mills.
It comes after iron ore hit an all-time high of $US193.85 ($249.84) per tonne on Tuesday according to a daily price published by S & P Global Platts, as demand in China rose in the lead up to a Labour Day holiday period from May 1 to May 5.
That surpassed a record of $US193 ($248.7) a tonne reached in February 2011 and represents an 18 per cent price increase in April alone.
The Macquarie analysts said market sentiment indicated this price could increase further, with “there is scope for spot prices to hit $US200 per tonne” as recent price movements already exceeded their forecasts.
“Chinese steel margins remain positive, with HRC and Rebar margins being $US178 ($229.4) per tonne and $US139 ($179.1) per tonne respectively,” they said.
“Sentiment in China has also remained strong across the steel supply chain.
“We note that iron ore prices are currently 36 per cent higher than our June quarter forecasts and are 45 per cent and 105 per cent higher than our CY21 and CY22 forecasts respectively.”
Fortescue Metals Group is the best placed of the miners to benefit from iron ore price dynamics, the analysts said, estimating that at current iron ore spot prices the Andrew Forrest-backed miner will generate free cash flow yields of 25 per cent in the next financial year.
This compares to free cash flow yields of 9 per cent for BHP, 23 per cent for Rio Tinto and 14 to 16 per cent for Mineral Resources and Champion Iron.
“Fortescue Metals Group is our preferred large cap exposure and we remain positive on both Rio Tinto and BHP,” the analysts said.
“Mineral Resources and Champion Iron are our key mid-cap picks and offers unique leverage to both the iron-ore price and capex cycle.”
Not all analysts are as bullish on iron ore as Macquarie: earlier this month UBS slashed its share price targets for Rio Tinto, BHP and Fortescue Metals Group, with its analysts stating iron ore is reaching an “inflection point” and at risk of falling sharply in price over the next year due to increased supply easing the willingness of Chinese buyers to pay higher and higher prices.
On Wednesday Commonwealth Bank Global Markets research commodities analyst Vivek Dhar said although iron ore prices should remain strong, demand in China may ease later in the year.
“China’s steel demand has surged due to stimulus measures deployed in 2020,” he said.
“Authorities allocated RMB 3.75 trillion ($745.49bn) in special local government bonds last year – a 74 per cent increase from 2019.
“These bonds are generally used to fund infrastructure projects.
“With policymakers allocating RMB 3.65 trillion ($725.7m) in special local government bonds this year, China’s steel demand will likely remain strong, albeit slightly slower than 2020.”
The steady rise in iron ore prices is one of the factors fuelling speculation the federal government could project a return to surplus within three years.
Iron ore exports are expected to deliver a revenue windfall after Canberra previously forecast iron ore would fall sharply to about $US60 a tonne this year.
