The three largest iron ore producers on the ASX have all risen to start the trade week.
BHP Group Ltd [ASX:BHP], Fortescue Metals Group Ltd [ASX:FMG], and Rio Tinto Ltd [ASX:RIO] have each risen 2% or more on the back of bullish iron ore prices.
Source: Market Index
After a shaky start to the year, iron ore prices appear to be rebounding as economies around the globe prepare to reopen.
Since the beginning of May, iron ore contracts have jumped more than 47% — seemingly unphased by China’s threats of import bans.
Empty threats from China
Calls by the Australian Government for an inquiry into the coronavirus pandemic has resulted in threats from the Chinese Communist Party to place tariffs on Australian imports.
The CCP has also made indirect threats to place similar tariffs on Australia’s iron exporters — a threat some have deemed hollow.
Western powers are already peeved with China’s handling of the COVID-19 outbreak, taxing Aussie iron imports which only set off more alarm bells.
Chinese manufacturing has already got a sense of what a shattered global demand for its exports feels like.
Source: Trading Economics
After sinking to its lowest level since first recorded in 2004, China’s PMI has managed to recover somewhat.
But it should serve as a warning to the world’s second largest economy.
Starving itself of Australia’s iron supply would also hinder the projects which are vital to its Belt and Road initiatives in Southeast and Central Asia.
China’s steel industry relies too heavily on Aussie iron ore.
There is no supplier able to fill any substantial gap if imports from Australia were reduced, meaning China would struggle to rev up its economy again.
So why the higher iron prices?
China has played its hand too early, threatening it could ‘easily’ turn to Brazil to sate its demand.
Brazil iron exports have been struggling struggling since the tailings dam collapse in January 2020.
Vale, the miner responsible, has been ordered to close several mines until they were inspected — shipments fell 13 million tonnes short of expectations.
Not to mention Brazil is much further an Australia.
The coronavirus has also slowed production in other iron producing countries.
At present, China is reliant on Australia for 62% of its iron ore supplies.
Steel mills in China are ramping up production, iron ore futures at the Dalian Commodity Exchange rising 2.2% last week, signalling a return for demand.
UBS analyst Glyn Lawcock said, ‘the market is very tight, everyone is running as hard as they can… you couldn’t find a spare tonne elsewhere in the market.’
Singapore’s Oversea-Chinese Banking Corporation has forecasted that iron ore prices could get back over US$100 per tonne, or even more if China barred Aussie imports.
Despite the bullish outlook for iron ore prices Aussie iron ore producers like BHP and Rio Tinto could see their earnings drop in 2020–21. In this free report, our financial analyst discusses why and mentions three alternative resource stocks with terrific short-term prospects.
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