Opportunity In Beaten-Down Iron Ore Miners?

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By Tim Boreham, Editor, The New Criterion

Iron ore has held up stoically in the wake of the well-publicised problems in China’s property sector the biggest single source of demand.

Can the metal maintain its Olympian performance?

Even the eerie vision of hundreds of new abandoned Chinese apartment blocks has failed to shock and ore, with the Pilbara iron export material trading around US$107/tonne compared with the decade average of around US$95/t.

One theory goes that the price resilience is partly due to increased global weapons spending, but surely all the projectiles lobbed at Ukraine or the Gaza Strip isn’t the key reason.

The (so-called) expert consensus price view for the current financial year is in line with this average: US$96/t. So it’s hard to get too excited about the prospects for the world’s most abundant and biggest-traded metal, a sobering thought for investors in BHP Group ((BHP)), Rio Tinto ((RIO)) and iron-pure play Fortescue ((FMG)).

Despite India’s stunning economic growth, China still accounts for close to half of global steel demand.

Last month’s Third Plenum the economic strategy meeting of Beijing’s heavy-hitters held only once every five years or so – failed to outline any tangible measures to boost internal consumption.

As always with the Middle Kingdom, there’s a few factors at play. While Beijing rushes to support the ailing housing sector, Chinese steel exports have been strong (up 25%, according to Citi).

But it looks like profitless growth because the average Chinese blast furnace currently runs at a loss.

Another dynamic is the nexus between the price of iron ore and scrap steel, which is the primary feedstock for electric arc furnaces and is also used in blast furnaces to convert pig iron to finished steel.

Citi notes when the iron price ran to US$130/t and the price of metallurgical (coking) coal the other crucial blast furnace ingredient hit US$350/t, this created a US$125/t price advantage of scrap over iron.

While scrap prices have since eased on increased supply, producers can’t change their production techniques quickly, so a big price differential remains.

Given the structural imbalances in China’s property market, the nation’s steel demand is unlikely to match historic levels.

The World Steel Association forecasts global steel demand this year to grow by 1.7%  in 2024, to 1.793bn tonnes, with further 1.2% growth in 2025 (to 1.815bn tonnes).

But China looked to have achieved “peak steel” in 2020, with flat demand this year and a likely -1% decline in 2025.

No surprises for guessing that India is filling the gap albeit from a much lower base with demand charging along at 8%.

According to broker Wilsons, the iron ore price consistently has found support at US$80-90/t. That’s bad news for the 10% of global producers operating at a cash cost of US$86/t.

But BHP can produce the stuff for $US18 a tonne. At its interim results this week, Rio Tinto disclosed operating costs of $US23.20/t, up 9% but still a long way from its average received price of $US105.80/t (down -1%).

“Australia’s iron ore miners are some of the highest quality producers in the world, and there are fundamental reasons to remain invested selectively within the sector,” Wilsons says.

On the supply side, Canberra’s Department of Industry Science and Resources forecasts iron ore exports of 1.451bt for the current year and 1.51bt in 2025 (a 4% increment).

Rio says seaborne supply increased by 3% in the June half, to 770mt. And despite its economic woes, China imported a record 640mt, up 5%

Let’s hope China can keep up the pace, because supply can only increase. Both Rio and BHP have aggressive Pilbara expansion plans, while in July Rio finally won approval for its $34bn Simandou iron-ore project in Guinea, with first production slated in a little as 18 months.

The project spans two mines and is expected to produce a combined, dial-moving tally of 120mt of seaboard ore per annum.

For those confident of resilient iron-ore demand in the longer term, better fortunes might lay in some marked-down alternative ASX-listed iron ore exposures.

For example, Mineral Resources ((MIN)) is the country’s fifth biggest iron ore producer but also owns three lithium mines and ore processing services.

The company last month announced the closure of its high-cost Yilgarn Hub iron ore operation in WA. The company also proposes expanding its Onslow iron ore hub servicing otherwise stranded deposits, from 35mt to 50mt.

Mineral Resources shares are -24% off the pace this year, given the lithium lull and concerns about high gearing.

The company is short of fans in broker land: Jarden, for instance, notes a surprisingly high capex bill for the company’s Onslow expansion project, of potentially -$1.3bn.

Despite Andrew Forrest’s hydrogen efforts, iron ore companies aren’t known for their low-emission credentials.

But quality ore produces lower carbon output than the dodgy stuff, so investors might want to consider Champion Iron ((CIA)) and its higher-grade Canadian mines.

Champion’s Bloom Lake in Quebec last week temporarily closed because of wildfires, but the company’s quarterly report shows record June quarter sales of 3.4m dry metric tonnes, 34% higher year-on-year.

Champion received an average US$125/t for its product, but its cash cost of US$77/t is significantly higher than its Pilbara peers.

Champion shares have fallen around -30% year to date, which is hardly a podium performance.

Another way to tap the iron ore theme is via Deterra Royalties ((DRR)), which derives most of its revenue from royalties from BHP’s Mining Area C (MAC) in the Pilbara.

With a 30-year mine life, MAC is the world’s biggest iron-ore hub accounting for 9% of seaborne supply.

Royalties align investors with volumes produced, rather than the commodity price. So unless BHP gives MAC the knife, an unlikely scenario, royalties should keep flowing in like hangers-on at a Buckingham Palace tea party.

Deterra shares have lost -25% year to date, compared with a -17% decline for the more diversified BHP.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision

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