How could the red-hot iron ore rally benefit investors?

Summary

  • Iron ore prices have registered a record rally in recent weeks, with prices surging to record high levels.
  • A robust economic recovery in the US and China, coupled with generous stimulus packages, have fueled the rally.
  • The price surge has benefitted iron ore suppliers, who reported record earnings in the past quarter and plan to share value returns to their shareholders.

Iron ore has turned into a red-hot commodity in the past few weeks. The prices registered a record high with resumption in industrial activity after China's Labour Day holiday. High demand from Chinese steel industries for iron ore, a key steelmaking ingredient, has kicked the spot prices of iron ore to US$237.57 per tonne on Wednesday, with a notable 3.8% intraday hike.

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The robust recovery in the global economic activity, coupled with slower supply recovery, has triggered the widely believed commodity supercycle. The two biggest economies - the US and China - have posted a strong rebound after an ease in the COVID-19 pandemic-driven lockdown.

China's commodity imports have recorded a groundbreaking surge in imports this year compared to the previous year’s figures. The country's overall import rose 43.1%, the highest since January 2011, as per General Administration of Customs data released on Tuesday.

Good Read: Iron Ore Price achieves a New Benchmark, Moves to CNY1,394 a tonne

Robust Demand Outlook

The supply disruptions due to bad weather conditions in leading iron ore producing countries, including Australia and Brazil, coupled with a robust economic recovery and US President Joe Biden’s US$2.3 trillion infrastructure plan, have led the prices of the base metal to the current levels.

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The demand is poised to grow further in the coming weeks as China is heading to enter into the wet season and wants to make the best out of the available time. The wet weather conditions in the country will reduce industrial activities and the demand for raw materials.

Leading market analysts, including Bank of America, lifted its iron ore forecast for 2021 by 27.5% to US$172 per tonne in 2021. Oversea-Chinese Banking Corp forecasted iron ore to US$250 per tonne in a note for the next 1-1.5 years. Another peer, Citi Group, expects iron ore prices to average nearly US$174 per tonne in 2021.

Must Read: Here's how the iron ore rally could benefit Australia's 2021 Federal Budget

Iron Ore Miners

With an ongoing iron ore rally that started to gain momentum in December 2020, followed by an ease in global lockdown, the world's leading iron ore miners have registered record earnings. The biggest iron ore exporters of the world, including Brazil's Vale S.A, Australia's Rio Tinto (ASX:RIO), BHP Group (ASX:BHP) and Fortescue Group (ASX:FMG), have reported strong March quarter earnings. Shareholders expect that this year’s dividend yield from the leading miners, including Rio, BHP and FMG, would be better than 2011 as the miners had big debt loads and robust growth investment plans at that time.

Interesting Read: Iron ore rally bumps up ASX miners’ profits; supply concerns remain

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It is tipped that Rio and BHP would pass 95% of the iron ore’s underlying earnings to the shareholders. A leading analyst of the Citi Group believes that FMG and BHP would pay a total dividend of US$8.0 billion and US$17.3 billion respectively, in the year to 30 June 2021. At the same time, Rio is tipped to give more than US$25.0 billion to its shareholders by December 2021.

Also Read: Australian iron ore exports to hit record levels in 2020-21: Govt report

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