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    Iron ore futures hit record as virus hits Brazil supply

    Luke HousegoReporter
    May 18, 2020 – 6.55pm

    The rally in iron ore prices boosting shares in Australian producers gathered pace on Monday, pushing futures for the base metal to record levels in Asian trade as evidence emerged that the COVID-19 pandemic was hitting Brazilian supply.

    September-dated futures on China's Dalian Commodity Exchange jumped by more than 5 per cent on Monday to reach ¥692.50 ($US97.34), the highest price obtained for iron ore contracts since the futures exchange was established in 1993.

    The rise in prices follows reports of falling shipments from the world's second-largest producer, Brazil.

    "Our shipping activity models highlight that supply from Brazil has dropped to the lowest levels seen since the tailings dam catastrophe quarter one [of] 2019," Westpac said. "Brazil is now just behind the UK in terms of highest COVID case count, with daily change rising by 15,000."

    Under Brazil's right-wing populist President Jair Bolsonaro, the country's national leadership has pushed regional authorities to prioritise the economy over containment of COVID-19, leaving it with close to a quarter of a million cases and the world's fourth-largest total case count.

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    "COVID-19’s outbreak in Brazil is threatening to disrupt iron ore exports even further. The virus is taking hold in [the Brazilian state of] Para, which produces around 35 per cent of the country’s iron ore," said ANZ chief economist David Plank.

    "Iron ore futures on the Singapore Exchange hit $US90 a tonne for the first time since March, on rising supply-side concerns," said ANZ's head of economics David Plank.

    The tight commodity market has pushed shares in Australia's major iron ore markets higher. On Monday Fortescue Metals Group and Rio Tinto shares climbed 5.8 per cent to close at $13.28 and $90.30 respectively, while BHP Group rose 4.5 per cent to end the day at $33.10.

    Demand-side boost

    The supply woes add to demand-side pressures that have firmed with the resumption in industrial activity in China, the world's largest iron ore importer.

    Data released at the end of last week showed industrial output in China continues to recover as the strict lockdown measures continue to fade. This has seen demand from the country's iron ore customers in steel making rise.

    The outlook for demand will be informed by China's annual economic objectives, which are expected to be unveiled following the National People’s Congress this week.

    The outcome of the annual gathering of China's political elite will be watched closely for information on stimulus measures or intentions to revive growth in the world's second-largest economy.

    Resources stocks do not look particularly expensive on forecast earnings, according to broker Citi.

    BHP is trading on 10.8 times 2020 earnings assuming a price of $30.61 a share, and Rio 9.4 times assuming a price of $83.26.

    "We assume $US60 a tonne iron ore pricing in [calendar year] '22 – and BHP and Rio still look well priced even on these iron ore prices," the broker said.

    Citi has a "buy" recommendation on BHP and a "neutral" on Rio.


 
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