UBS commodities analyst Daniel Morgan thinks the current iron ore price rally is unsustainable.
“The price at the moment is above a sustainable medium-term price. If this price was seen as any way sustainable, you’d get suppliers lifting production,” he has told Fairfax Media.
He added, “A lot of the marginal tonnes which have left this market, let’s call it around 200 million tonnes of high-cost suppliers that have exited in the last two years, if this price was to be anyway sustained I’m sure they’d re-enter the trade, but they haven’t.”
It’s been good news for Australia’s iron ore miners, with their share prices surging.
Atlas Iron Limited (ASX: AGO) has seen its share price double in just a week, BC Iron Limited (ASX: BCI) is up 55% over the past five trading days, Grange Resources Limited (ASX: GRR) is up 27% over the same period, Fortescue Metals Group Limited (ASX: FMG) is up nearly 16%, and Rio Tinto Limited (ASX: RIO) is up more than 10%.
Since October 24, the iron ore price has surged 35% from US$59 a tonne to US$79.81 on Friday. That has been driven by higher steel production, a soaring coal price and potentially speculators re-entering the market.
In April-May this year China’s regulators took steps to discourage speculation in the commodities markets which resulted in sharp falls in trading volumes and prices. Iron prices fell from US$70.46 a tonne on April 21 to US$49 a tonne on May 26. if speculators are again suspected of driving prices higher, Chinese authorities could act again.
Some market commentators have attributed the soaring commodity price to the US election win by Donald Trump, but the fact is that commodity prices were rising weeks before the election and most people did not expect Trump to win.
UBS’s Morgan also points out that structural issues in China’s property market and therefore steel overcapacity still exist. At some point, that could correct itself which will likely result in lower prices for iron ore – and coal.
If the iron ore price can maintain these levels, that’s good news for Australia’s economy. The May Budget had priced in iron ore prices of US$55 a tonne so that higher prices would be a massive boost to the budget, as well as the junior iron ore miners.
Man who said buy Kogan shares at $3.63 says buy these 3 ASX stocks now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.
*Returns as of 6/8/2020
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.
- Why PWR Holdings Ltd could see its share price rise from here – July 21, 2017 12:11pm
- Fortescue Metals Group Limited share price sinks on native title decision – July 20, 2017 4:23pm
- 5 overlooked finance shares to add to your watchlist – July 20, 2017 2:33pm