Why BHP Billiton Limited is negative on the long term price of iron ore

BHP Billiton Limited’s (ASX: BHP) share price has had a good run since January 2016 when the price bottomed at $14.20 but now is back to $31.74 at the time of writing, which is a more than 100% rise.

The rally in the share price in the last year, with an increase of 40%, is due to strong FY17 earnings and an upbeat outlook for FY18. But, it was reported in The Australian newspaper today that the head of BHP marketing, Arnoud Balhuizen, said that while there is a strong short-term outlook for iron ore and coking coal, in the long term prices are likely to fall as lower cost iron ore producers increase their volumes. China’s push for cleaner air has increased demand for higher quality iron ore and is expected to continue.

Rio Tinto Limited (ASX: RIO) is also a miner of higher grade iron, which is receiving a price premium, while Fortescue Metal Group Limited (ASX: FMG), a producer of lower quality iron ore has been hit by discounts.

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Motley Fool contributor Rosemary Steinfort owns shares of BHP Billiton Limited. 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 Scott Phillips.

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