Could Iron Ore Miners Finally Be A Buy?
So much of the commodity world is controlled by how China is doing. As the largest consumer of pretty much every natural resource under the sun, the rising and falling Chinese economy can wreak havoc on underlying commodity prices.
Case in point: iron ore.
As the Chinese economy has cooled, prices for the steel component have plunged over the last few years. All in all, that’s caused plenty of headaches for the companies that mine the mineral. Yet, things may finally be looking up for the iron ore miners. Expanding economies in Asia, U.S. and Europe are expected to help push steel demand - and thus iron ore demand - higher throughout the year. For investors, the recent bearish sentiment on iron ore prices could be a great time to buy for a longer term horizon.
Rising Demand
Since peaking at $187 per ton back in 2011, iron prices have been flagging - down around 15% in the last year. The latest news out of China didn’t exactly help. HSBC Holdings plc (NYSE:HSBC) Purchasing Managers' Index (PMI) for Asia’s Dragon economy showed a reading of 48.1 in March. That’s an eight-month low and below the 50 mark - meaning that the economy is in contraction. That reading has depressed iron ore prices so far into 2014.
Yet, there could some bullish catalysts propelling the mineral.
First, steel production grinding is its way upwards. According to a World Steel Association report, steel production in Asia is expected to increase by nearly 25% by 2020. That will cause imports of iron ore to rise by 35% over the same timeframe. As other emerging-market nations such as Thailand and Vietnam begin picking up the slack and building out their vital infrastructure, steel/iron ore demand will be strong. Likewise, recent gains in European and U.S. manufacturing have also buoyed steel production and demand.
Then there is China itself to consider.
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While its recent PMI is disappointing, Chinese iron imports have risen during the first three months of the year. For the first quarter, China imported 19% more iron ore than last year’s first quarter - at 222 million tons. More importantly, even with a contracting manufacturing base during March, China still imported 21% more iron ore for the month. Annualizing its first-quarter imports implies that China is on pace to import more than 890 million tons worth of ore this year. That’s about 70 million more tons than 2013’s total.
Add to this recent stimulus announcements by Beijing and the fact that the $120-per-ton mark for iron ore is where many smaller iron ore producers begin to become unprofitable and you have a situation for rising prices and profits for the miners.
Making An Iron Ore Play
The absolute best has to be Melbourne, Australia-based BHP Billiton Limited (NYSE:BHP). Despite being a diversified miner, iron ore currently accounts for about 31% of BHP’s total revenues and China ranks as the firm’s biggest customer. What’s more, any incremental increase in iron prices will only help BHP’s bottom line. For example, the recent slight price increase to $117.10 per ton will add a revenue boost of about $585 million to BHP’s bottom line. Likewise, fellow mega-miner London-based Rio Tinto Group (NYSE:RIO) derives 41% of its revenues from iron ore. One more Australian company to consider is Fortescue Metals Group Ltd. (OTCBB:FSUMF).
The Bottom Line
Things haven’t been so great in the iron ore sector over the last few years. Prices are way off their highs. But rising global steel demand, as well a recent rise in China imports, should help lift prices. For investors, that could signal a great time to bet on iron miners.
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