Iron ore is an integral part in industrial use and crucial to economic well-being. This metal is a vital ingredient for making steel, which is used in construction, military application, infrastructure, machinery, appliances, transportation, agriculture, energy generation and many other end markets. Huge dependence on steel and iron ore has made the global economy highly susceptible to changes in their prices, demand and supply.
We believe that the gradually improving global economy is one of the major factors that boosted iron ore prices in the last year. The International Monetary Fund anticipates the world economy to grow 3.6% in 2017 and 3.7% in 2018. Also, the World Steel Association projects the global steel consumption to grow 1.3% in 2017 and 0.9% in 2018.
Particularly for the United States, we believe the Trump government’s proposed infrastructure investment of $ 1 trillion, if implemented, will spur demand for steel and hence for its key raw material. Other tailwinds are the strengthening housing, automotive and commercial construction markets. China, the world’s largest producer of iron ore and biggest importer of the metal, is worth a mention here. Growth in the country’s Gross Domestic Product as well as improving construction sector have been the prime catalysts driving iron ore prices in the last year.
Falling Iron Ore Prices
Iron ore prices have been quite volatile in the last month. It climbed to $ 75.2 at day-end Sep 12 while falling to $ 59.3 on Oct 11. In the last month, iron ore prices have declined roughly 21%. An oversupplied iron ore market has been partially responsible for the fall in the metal’s price.
Moreover, China’s efforts for curbing pollution in the winter months by cutting down its steel production are likely to hurt the demand for iron ore in the region. Notably, the country principally imports iron ore from Australia, Brazil, South Africa, India and many more.
Stocks in Focus
In the current scenario, when iron ore prices have fallen sharply and expectations of a rebound in the near term are weak, the mining companies will be adversely impacted. Moreover, even in oversupply situation, these companies keep their production running in order to keep costs in control. This further aggravates the oversupply problem and hence, putting more pressure on iron ore prices.
Stocks that are in focus in such a situation are briefly discussed below:
BHP Billiton Limited BHP: This Australian company, with $ 111 billion market capitalization, is one of the largest diversified resource companies in the world. It is primarily engaged in mineral exploration, production and processing and oil and gas exploration, development and marketing.
In fiscal year 2017 (ended Jun 30), the company generated roughly 38% of its revenues from iron ore business. The company anticipates iron-ore productivity to be within 239-243 million tons (Mt) in fiscal 2018, representing year-over-year upside of 3-5%. Improved productivity will come on the back of increased yield of the Western Australia iron ore mine.
The stock currently carries a Zacks Rank #3 (Hold). In the last month, the company’s shares have lost 5.4%, wider than 3.2% decline of the industry it belongs to.
VALE S.A. VALE: This Brazilian company is one of the world's largest producers and exporters of iron ore and pellets. It currently has $ 51.4 billion market capitalization. The company’s two integrated systems — the Northern System and the Southern System — consists of mines, railroads, port and terminal facilities, and a system comprising MBR's (a subsidiary of Vale) mines and port facilities. These systems help in production and distribution of iron ore.
In second-quarter 2017, the company generated roughly 71% of its revenues from iron ore business. During the quarter, roughly 96% of the amount spent on ferrous minerals operations were dedicated to the S11D project.
The stock currently carries a Zacks Rank #3. In the last month, the company’s shares have lost 11.3%, slightly wider than 11.1% decline of the industry it belongs to.
Rio Tinto plc RIO: The company primarily engages in the mining, processing and marketing of mineral resources. This U.K.-based company currently has $ 81.5 billion market capitalization.
In first-half 2017, the company generated roughly 44% of its revenues from iron ore business. It is working toward Silvergrass iron ore development in the Pilbara.
The stock currently sports a Zacks Rank #1. In the last month, the company’s shares have declined 2.2%.
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