Early gains by iron ore miners have petered out as commodity analysts and the managers of the largest iron ore producers grow increasing divided over the outlook for Chinese steel production.
Shares in BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) couldn’t hold on to their morning advance and have slumped 0.6% to$22.66 and 1.2% to $1.79, respectively, in afternoon trade.
Rio Tinto Limited (ASX: RIO) may be bucking the trend to trade 0.4% higher at $48.20, but it is well off its high for the day.
Brazilian iron ore miner Vale came out swinging overnight to refute predictions by a growing number of brokers that Chinese steel production has peaked and/or is shrinking.
The miner said Chinese steel consumption is still rising, albeit at a slower clip than what it was before. Iron ore is a key ingredient in the production of steel.
“Despite the slowdown of the growth speed, China still remains the economic engine of the world,” Vale’s global director of ferrous marketing and sales said in a Bloomberg report.
The comments echo similar sentiments expressed by Rio Tinto and BHP Billiton, but stand in contrast to the bearish forecasts by analysts from Australia and New Zealand Banking Group (ASX: ANZ) who believe the peak for steel production passed in 2014 and are anticipating a further drop in the commodity.
The price of iron ore fell 1.6% last night to $US55.30 a tonne and is down 5% this week.
Credit Suisse has added its voice to the debate by calling for a 10% drop in Chinese consumption by 2018 while Citigroup warned on Tuesday of more pain for commodities due to weak demand and oversupply.
But that’s not likely to sway Rio Tinto, who has been the most bullish of the major miners. It produced stacks of documents to support its claim that global supply of iron ore will need to increase 15% a year as Chinese steel production will only peak in 2030 at one billion tonnes.
The truth is no one really quite knows as there isn’t a lot of transparency when it comes to economic data from China.
What’s more, history has shown that analysts and the miners have not been particularly accurate at forecasting the price of iron ore.
However, I am more inclined to believe the miners for one simple reason – they are putting their money where their mouth is.
Having said that, investing in the sector is not for the faint hearted even though valuations appear cheap.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd.. Follow me on Twitter - https://twitter.com/brenlau
Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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