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The major iron ore producers on Australian stock exchange (ASX) saw an up-rise in prices after Brazilian major iron ore miner Vale halted its operations. The share prices of Rio Tinto (ASX:RIO), BHP Group Ltd (ASX:BHP), Fortescue Metals Group (ASX:FMG) have been up from the past few consecutive trading sessions as market participants predict for good global iron ore demand and supply scenario which can lead to a price hike in iron ore prices; and as a result, these companies can take advantage of the rise in commodity prices. In fact, BHP, RIO and FMG, all witnessed a share price rise of 1-2% on February 06, 2019.
Is Iron Ore price set to Leap above $100?
To answer this question let us have a look at global demand and supply scenario for iron ore. Iron ore as a significant raw material in steel production is a highly sort-after commodity.
Steel Demand
In October 2018, world steel association published its Short-range outlook (SRO) which looks ahead (7-5 months) in future for steel demand. As per the statistics, the steel demand was expected to grow worldwide by 1.4% from 1657.9Mt to 1681.2Mt. As per the data, United States steel demand is expected to grow from 99.9Mt to 101.2Mt, while steel demand for China is supposed to be stable at 781.0Mt and steel demand in India is projected to increase from 95.4Mt to 102.3Mt.
What is driving the steel demand?
Steel is used as a great collaborator with other materials to advance growth and development and is a highly sort-after material in various industries (like Infrastructure, Construction, Automotive, Transportation, Energy, Machinery and Packaging). The more the Skyscrapers an economy wants to build the more the steel they would require. As a prosperous economy needs steel for every bit of use the demand is seen on a higher side. Now, this equates to higher iron ore requirement.
Recent developments in Iron Ore market
Vale, the Brazilian iron ore mining giant, halted it mining operations following the dam collapse that happened in Brazil last month and Vale also declared a force Majeure on a part of its contract. Vale, the Rio de Janeiro based company, has suspended operations at its Brucutu mine, which is expected to create a production loss of 30 Mt annually. So, the production loss in iron ore mine and high steel demand globally may push the iron ore prices, and we may see it touch a level around $90, at least in short to medium term. However, moving over $100 a tonne is subject to many aspects and also how Vale manages the present challenge that is associated with respective production cut.
How will the Companies on ASX benefit from this?
The key listed iron ore producers like Rio, BHP and FMG can take advantage of higher commodity prices; and with strengths from their production results, the overall performance can be up and running. As per Rio, groupâs Pilbara iron ore production in Q4 2018 was up 2% as compared to Q4, 2017; and the company approved a $2.6 billion investment in the Koodaideri iron ore replacement mine. Similar moves by other companies on ASX if noticed will see a production surge and these companies can leverage from the higher commodity prices.
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