China's iron ore futures soared by 3.3% aftermarket on Thursday, as ASX 200 miners pushed to new highs. The BHP Group Ltd (ASX: BHP) share price was up 2% to $41.95, while Rio Tinto Limited (ASX: RIO) climbed 3% to $106.26, and Fortescue Metals Group Limited (ASX: FMG) jumped 5.5% to $9.18.
Iron ore prices continue to surge following the well-known fatal disaster at Brazil's Vale SA tailing dam, while big Australian miners were affected by a tropical cyclone earlier this year.
Are ASX miners a buy?
Iron ore fundamentals are still looking bullish, despite hitting new highs week-in, week-out. The metal has traditionally been regionally constrained, with the majority of supply coming out of Australia and Brazil. The aforementioned disasters have resulted in a loss of approximately 90 million tonnes of an annualised supply of about 1.7 billion tonnes. While the loss in supply is a small percentage, it reflects the tight nature of the iron ore market.
It is interesting to note that Vale SA has recently announced that it will fully resume operations at its Brucutu mine after an appeals court overturned an earlier ruling that halted production. At the same time, Rio Tinto made an announcement that it would be cutting its Pilbara shipments for 2019 from 333–343 million tonnes to 320–330 million tonnes. The net result between Vale SA and Rio Tinto is another loss in iron ore supply.
I anticipate these tight supply conditions to continue in the short term.
However, there are a few factors that may result in a turn of the seemingly unstoppable iron ore train. The first is a lesson from lithium markets. As the spot price starts surging, it encourages new players and idled operations to start and quickly enter the market. In addition, rising iron ore prices could push the main consumers of iron – Chinese steel mills – into the red. And finally, Vale SA had recently reaffirmed its 2019 iron ore sales guidance of 307–322 million tonnes and said that sales should be around the midpoint of that target range, up from its previously forecast low-end of the range.
Foolish takeaway
Iron ore markets should continue to ride the momentum of tight supply and strong demand side fundamentals. Good opportunities to buy these quality miners should continue to emerge in the coming days and weeks.
