Iron ore shares rise despite sinking commodity price

Credit: iStock

A number of iron ore miners have seen their share prices rise, despite the spot iron ore price sinking 2.5% overnight to US$51.20 a tonne.

In early trading, Atlas Iron Limited (ASX: AGO) share price was up 6.7%, Fortescue Metals Group Limited (ASX: FMG) up 2.9% to $2.47, and BHP Billiton Limited (ASX: BHP) up 1.6%.

So far this year though, the commodity has defied expectations, rising 18% and appearing to have established a holding pattern above US$50 a tonne.

However, according to Capital Economics Ltd, the rising commodity price has probably been driven by restocking by Chinese steel mills and some weather-related disruptions to Australian shipments. Exports from Port Hedland declined to 33.8 million tonnes in January, from 37.6 million tonnes in December – the lowest value since June 2014. China bound cargoes dropped to 28.9 million tonnes from 32.2 million tonnes in December 2015.

Capital Economics says these factors are temporary – with cargoes from Australia set to increase, while restocking will also taper off. Port holdings of iron ore are at their highest levels since May 2015 – according to Bloomberg.

The company also says that Chinese steel production could fall quite sharply this year as Australian iron ore output will continue to rise. While BHP and Rio Tinto Limited (ASX: RIO) have slowed their growth in production, Gina Rinehart’s Roy Hill mine only entered production in December 2015 and is ramping up to produce 55 million tonnes annually.

China accounts for half of the world’s steel supply but domestic steel consumption is expected to fall by 5% according to Moody’s Investor Services, after a 5% drop in 2015.

Foolish takeaway

National Australia Bank is forecasting average prices for iron ore of US$42 a tonne this year – suggesting there are more falls ahead, and stating that the recent rally couldn’t be sustained.

The rising iron ore price has seen the share prices of the commodity producers jump in the past month, including an 88% gain for BC Iron Limited (ASX: BCI) and a 36% rise in Fortescue’s share price.

Should the iron ore price fall, those share price gains could rapidly evaporate.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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