Iron Ore Resurgence and Improved Rating for ASX Miners, Goldman Upgrades BHP Shares 

Summary

• Iron ore prices are experiencing a rebound with futures on Dalian Commodity Exchange increasing ~ 4.17 per cent after taking slight correction from the record value of RMB 947.50.
• Robust demand from China amid high steel production along with early indications of potential disruption in the Australian iron ore supply amid political dispute is keeping the price afloat.
• China produced 93.4 million tonnes of crude steel in July 2020, 9.1 per cent higher year-on-year and 1.95 per cent up month-on-month.
• Australia recorded a 17 per cent decline in exports to China in July 2020 with metalliferous ores exports tumbling 12 per cent against the previous month.
• Over improved steel outlook in China, iron ore prices are expected by the market to remain relatively high compared to the pre-pandemic levels, providing a direct benefit to ASX-listed iron ore stocks.
• Goldman Sachs has upgraded BHP from Neutral to Buy with a TP of $40.1 a share.

Iron ore prices are finally showing a rebound across China. Robust demand from China amid high steel production along with early indications of potential disruption in the Australian iron ore supply amid political dispute is keeping the price afloat.

Iron ore futures on the Dalian Commodity Exchange rebounded from RMB 816.00 per dry metric tonne (intraday low on 10 September 2020) to RMB 850.00 (intraday high on 14 September 2020), marking a price appreciation of ~ 4.17 per cent. Iron ore futures witnessed a record value of RMB 947.50 per dry metric tonne (intraday high on 31 August 2020).

China Robust Steel Production

As per recent data available with the World Steel Association (or WSA), China produced 93.4 million tonnes of crude steel in July 2020. The figure is 9.1 per cent higher against the previous corresponding period (or pcp) and 1.95 per cent up against the previous month.

Furthermore, steel production in China is anticipated by many industry experts to remain robust ahead amid infrastructure stimulus injected by the government, leading to high internal consumption. Apart from that, fixed income investment across China is also witnessing smooth growth, providing an impetus to steel demand.

To Know More, Do Read: China Poised to Grab the Global Steel Trade as Economies Open up for Trade

The Emerging Signals of Supply Disruptions

After witnessing strong iron ore exports to China during the first half of 2020, Australia recorded a 17 per cent decline in exports to China in July 2020 with metalliferous ores exports tumbling 12 per cent against the previous month of June 2020.

Likewise, other Australian exports to China, especially resources, declined with coal exports plunging by 42 per cent after China imposed stringent measures on coal import to support domestic coal mines.

The growing feud between China and Australia over trade is now putting Chinese firms into risk, which are now diversifying their risk by securing multiple supply chain of iron ore for the robust steel industry.

For example, as per data from India’s Department of Commerce, its ore exports to China soared by 53.18 per cent on a yearly basis in July 2020.

In a nutshell, China’s steel production and domestic consumption remain robust, which coupled with a trade fuss with Australia, is leading to a spike in iron ore prices.

Furthermore, many industry experts anticipate that both steel production and demand would remain at large ahead, extending further support to iron ore price across China.

ASX-listed Iron Ore Players

Goldman Sachs Upgrades BHP from Neutral to Buy

ASX-listed iron ore players such as Fortescue Metals Group Limited (ASX:FMG), BHP Group Limited (ASX:BHP) and Rio Tinto Limited (ASX:RIO) have witnessed strong iron ore business in the recent quarters with many such as FMG reporting record revenue for FY2020.

To Know More, Do Read: Fortescue Metals Surpasses All Expectations, Stock Hits Another Record High

Iron ore emerged as one of the best-performing commodities of the COVID-19 times with prices experiencing record highs in the recent past.

• With recovery in the Australian and Brazilian iron ore supply chain, stock prices of such miners halted their rally with some even trending downward for a while.
• However, with improved steel outlook across China, iron ore prices are expected by the market to remain relatively high compared to the pre-pandemic levels, providing a direct benefit to ASX-listed iron ore stocks.

Furthermore, citing the same reason, global investment banking giant – Goldman Sachs improved its rating on BHP Group from “Neutral” to “Buy” with a price target of $40.10 a share, implying a ~ 7 per cent upside potential over the next 12 months (excluding dividends).

The investment banker underpinned the growth potential after its commodity team uplifted iron ore price forecasts through to 2022.

The commodity team of the investment bank forecasts average price to reach USD 105 a tonne during the fourth quarter of the year 2020, up by ~ 31.25 per cent against the previously estimated level of USD 80 a tonne.

Moreover, the team assessed that the price would later become nominal to USD 90 a tonne in 2021 (previous – USD 80 a tonne) while declining to USD 75 a tonne by 2022, which remained ~ 7.14 per cent up against the previous estimate of USD 70 a tonne.

Also Read: Iron Ore Prices Poised to Weather the Supply Normalcy Storm?

In tandem to the iron ore price forecast, Goldman Sachs suggested that BHP’s shares are good value at the present level.

The bank suggested that shares of BHP with a 12-m target price of $40.1; and suggested some of the valuation parameters as below:

• Valuation at the stock trading at 0.95x of the net asset value ($38.4 a share).
• Discounting long-run real iron ore price of USD 60 a tonne along with a best next 12-m free cash flow yield of 10 per cent.

Apart from the iron ore business, Goldman Sachs suggested that other businesses of the Company such as oil, copper, and metallurgical coal also played a part in the valuation.

Also Read: Iron Ore Price Rally Tail Winds Aid BHP Group Post Strong Performance in FY20

(All currencies in AUD unless or otherwise stated)