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magazineFTSE 100 miners on the charge as iron ore hits five-year high
The price of iron ore recently hit a five-year high and some have tipped it to stay higher for longer, spelling good news for the likes of BHP (BHP), Rio Tinto (RIO) and Anglo American (AAL).
Many believe the boom time for iron ore miners won’t last but there are reasons to believe the price of the metal could stay higher for longer than people expect.
Iron ore prices have climbed almost 70% this year and rose to a five-year high last week, reaching $126 a tonne thanks to increased Chinese steel demand and lower supply from the largest producers, Brazil and Australia.
China accounts for around half of global steel output, so any fluctuations in its demand for iron ore – the key ingredient in making steel – can have a big impact on the market.
Thanks to supply issues, analysts at Jefferies expect iron ore to hover around the $110 a tonne mark for the rest of the year, and remain elevated at around $98 a tonne next year, even if demand softens.
Problems at Brazil-listed miner Vale, which halted some iron ore production after the tragic dam collapse at one of its mines in January, as well as production issues at BHP and Rio Tinto mines in Australia – three of the largest iron ore miners in the world – have taken a significant chunk of supply out of the market.
Despite their problems, BHP and Rio Tinto have both been beneficiaries of the deficit they’ve helped create, with their shares up around 20% to £19.85 and 24% to £48.29 respectively in the year-to-date.
Anglo American, another major iron ore producer, has also done well this year with its shares up around 20% to £21.38.
There are concerns however that the rally in their share prices is only temporary, and they could fall as rapidly as they’ve risen.
Part of this is due to anticipated weaker demand from China, as well as tightening environmental rules and higher taxes in countries like Brazil and Australia.
However, a dramatic drop in Chinese iron ore stockpiles has seen inventories hit a two-year low. That means, in the view of analysts, even if demand softens there still won’t be enough supply and so the price of iron ore will remain resilient.
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