Macquarie reiterates optimistic outlook for iron ore minersLuke...

Macquarie reiterates optimistic outlook for iron ore miners

Luke Housego

Macquarie's wealth management team has reaffirmed its outperform rating for Australia's iron ore producers, with leading indicators of demand for the commodity adding to the outlook for earnings and cash generation in the sector.

"We remain positive on stocks with iron-ore exposure due to strong cash flow yields and medium-term earnings upgrade momentum," Macquarie's analysts said.

Iron ore futures in China surged since the end of April. Bloomberg

"FMG and RIO preferred in large caps (BHP’s near-term earnings risk
heightened by weak coking coal and energy prices)."

Macquarie noted both supply and demand-side factors are expected to continue to support sales prices among the miners.

Shipments from the Brazilian iron ore major Vale could be lower in 2020 compared to the previous year, the investment bank's analysis explained.

"Vale produced 60 million tonnes of iron ore in the [March quarter]. Shipments were broadly in line with production at 59 million tonnes," Macquarie said.

"The result was well below downgraded guidance of 63-68 million tonnes (guidance was originally 70-75 million tonnes) for the [March quarter].

"Vale has cut CY20 shipment guidance to 310-330 million tonnes (down from 340-355 million tonnes) suggesting CY20 shipments could be lower than in CY19 (312 million tonnes)."

The outlook for iron ore demand looked positive, Macquarie added, with higher steel prices and weaker coking coal prices boosting the margins and spending power of China's steel makers.

Macquarie said total iron-ore port stocks in China have fallen to 112 million tonnes, down 15 per cent from the high in early February.

"Port stocks are now below the July 2019 low of ~115 million tonnes, when iron-ore prices spiked to $US120 per dry million tonne."