Australia’s large iron ore players are up today.
At time of writing, BHP Group Ltd [ASX: BHP] increased by 4.59%, Fortescue Metals Group Ltd [ASX: FMG] is trading 4.07% higher, and Rio Tinto Ltd [ASX: RIO] is up by 3.85%.
Australia is the largest iron ore exporting country in the world, followed by Brazil.
Why are iron ore producer shares up today?
Overnight iron ore prices jumped 3.5% on both supply and demand changes.
For one, China is starting to ramp up their demand for iron ore as they reopen their economy.
On the other hand, Brazilian iron ore producer Vale is suffering production disruptions because of the pandemic. At the end of April, the company already had to revise their production guidelines for the year 2020 down to 310–330 million tonnes from their previous forecast of 340–355 million tonnes.
Last year, when a dam burst in Brazil causing the closure of several mines and affecting Vale’s production, iron ore prices spiked up to $120. A hit to iron ore supplies usually boosts prices.
What could happen next?
While Brazil is suffering disruptions to their iron ore production, so far Australian producers are coping with the outbreak.
The fact that our largest iron ore export market, China is turning to infrastructure spending to stimulate the economy could support iron ore demand. Yet this is at a time when China is already running on high debt, and COVID-19 is causing a global economic slowdown that could affect demand in the future, pushing prices down.
Also, there’s no telling how the trade spat between China and Australia could affect iron ore, though with Vale having production problems, it’s likely that the high demand for Australian iron ore from China will continue.
And of course, there is the risk that at any time there could be a resurgence of the virus that closes up the Chinese economy again, which would decrease demand.
So far, iron ore prices are rising in the short term.
Yet in the report ‘Aussie Iron Ore Crash 2020’ Rum Rebellion’s Lachlann Tierney explains why we could see lower iron ore prices and offers three other investment ideas that could fare better.