The iron ore price could be poised to surge over US$100 a tonne as Chinese traders return from the Chinese New Year break to play catch-up with the rest of the commodities market.
The price of the steel making ingredient surged 24% since the collapse of Vale SA’s Brumadinho dam in Brazil on January 25 and has rallied over 6% since the start of the Lunar New Year week-long celebrations in China to around US$92 a tonne.
The tragic event sent the Fortescue Metals Group Limited (ASX: FMG) share price surging 44% since the start of the year while the Rio Tinto Limited (ASX: RIO) share price added 15% and BHP Group Ltd (ASX: BHP) share price added 3%.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index added close to 8% over the same period but BHP’s underperformance is probably due to the stock going ex-div as it traded without its generous special dividend entitlement in early January. BHP has also been outperforming the other iron ore producers over the past year, so some consolidation was expected.
Iron ore heading to over US$100/tonne?
However, the stock probably won’t be lagging for much longer with some analysts predicting that the iron ore price could jump over US$100 a tonne as commodity markets have a tendency to overshoot and undershoot to the up or downside.
What will add to the volatility is the fact that no one knows how much production Vale will be taking off the market as the embattled miner had to stop operations in a number of its mines.
Some of the closures have been ordered by Brazilian authorities who are inspecting the safety of Vale’s other tailings dams while some of the production stoppages were voluntary.
Vale intends to ramp up production at its mines in other countries, but there’s speculation that other governments will also be issuing a stop-work order to Vale to check on its dams and that could leave the iron ore market in a supply deficit for weeks, if not longer.
Slowdown concerns take a backseat
I would be surprised if our miners aren’t proactively inspecting their tailings dams to head off any concern, although the timing of the disaster, while tragic due to the number of lives lost, couldn’t come at a better time for Vale’s rivals as the outlook for the iron ore price was gloomy late last year.
There are worries that the trade war and economic slowdown in China would drag on demand for steel, and therefore iron ore by extension.
These concerns haven’t dissipated, although they will likely take a backseat until there is greater clarity on the production shortfall and length of the mining shutdown from Vale.
But the iron ore price isn’t the only thing to watch for this reporting season. There’s speculation (or rather hope) that BHP will unveil another capital return when it reports its result next Tuesday.
This could be the trigger for the BHP share price to close the gap with its peers.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, and Rio Tinto Ltd. 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.