Iron-ore slump slams miners
“China’s moves to rein in its mammoth steel industry have roiled [iron ore] markets this year,” say Krystal Chia and Yuliya Fedorinova on Bloomberg. Global iron-ore prices hit a record high in May; contracts for spot (immediate) delivery to north China soared to over $235 a tonne. Since then, they have slumped by around 60%, falling below $100 a tonne for the first time in a year.
The turmoil in the real-estate sector (see page 7) has played a minor role in the latest slump. However, the underlying cause of both boom and bust is the government’s attempts to curb steel production, in order to reduce power consumption, cut carbon emissions and – most pressingly – improve air quality ahead of the Winter Olympics next year. Hence the industry saw iron-ore prices “spiking in the first half as [steel] mills rushed to front-load volumes ahead of additional production restrictions being rolled out”, followed by the recent rout as demand dried up.
An overreaction both ways
Just the surge in May was “an overblown rally”, the plunge was “a disorderly retreat”, says Clyde Russell on Reuters. Neither was “fully justified by the fundamentals of supply and demand”. Changes in physical shipments of iron ore are “nowhere near as dramatic as the moves in prices”. China’s iron-ore imports in the first eight months of the year were down just 1.7% from the same period in 2020; imports in August were the highest since April, with no sign that inventories at ports are building.
The fact that price moves have been so excessive may be due to “increased speculator interest in a market that traditionally was the preserve of large players, miners and steel mills”. In any case, with prices around $100/tonne, conditions look more balanced. “History suggests that iron ore is likely to spend more time below $100 a tonne than above it.”
Blue-chip miners look cheap
The slump has sparked “panic selling” in blue-chip miners, says Alex Gluyas on the Australian Financial Review. “Analysts predict the worst may not yet be over… so investors are at a crossroads in terms of trying to catch a falling knife by picking a bottom of the iron-ore price, or rotating out of heavily exposed iron-ore stocks.”
Yet diversified miners such as Rio, BHP, Anglo American, Glencore and Vale “are in the best shape ever”, says Andrew Bary in Barron’s. Their balance sheets are strong. Limited capital expenditure means good cashflow. “Even with the slump in iron ore, the producers remain highly profitable… other commodities are in better shape.” Copper is up 20% this year, aluminium is up 40% and thermal coal prices have doubled. Price/earnings ratios are in single digits and dividends are attractive.
“For investors willing to accept some risk, the Big Five miners offer a rich opportunity.”