China's iron ore futures finished up 2.34% on Monday, as the share price of ASX miner Rio Tinto Ltd (ASX: RIO) is up (at time of writing) 0.67% to $104.61, while the BHP Group Ltd (ASX: BHP) share price is up 0.78% to $41.32 and Fortescue Metals Group Ltd (ASX: FMG) has gained 2.88% to $9.10.
While these gains may not be amazing, this follows the S&P/ASX 200 (INDEXASX: XJO) falling 43.5 points or 0.65% from its recent 11-year high. With the general market pulling back from levels we have not seen in 11 years, the question remains – is there still steam left in the iron ore train?
What's the outlook for iron ore?
Iron ore supply remains tight as China's iron ore imports rebounded in May from an 18-month low in April as disruptions to output in Brazil and Australia eased shipments. Chinese trade data for June showed iron ore imports falling to 75.18 million tonnes last month, well below the 83.24 million tonnes imported in the prior year. At the same time, the iron ore inventories of Chinese mills are dropping significantly on record production.
I believe that there is room for an iron ore bear case with factors such as China enforcing production restrictions on heavy industrials in the winter and tightening its emission assessment on steel mills, which may curb iron ore demand. The worlds largest iron ore miner, Vale SA, has also stated that it will fully resume operations at its Brucutu mine after an appeals court overturned an earlier ruling that halted processing because of concern about the safety of a nearby dam. The recent surge in iron ore prices may also reignite iron ore exploration and production that might not have existed at lower price levels.
However, I save this bear case for another day because I am confident that there is still plenty of steam left in the iron ore price.
Spotlight on Fortescue Metals
A research note produced by Macquarie Wealth Management has placed a price target of A$10.50 on Fortescue Metals. This represents a 19% discount vs. today's prices. Macquarie has stated that "FMG remains our preferred bulk commodity pure play exposure after incorporating the updated commodity price outlook" and "retain significant upside using spot prices."
The iron ore spot price, whether it's China's iron ore futures or in US dollars, is still within 2–3% of recent highs, while Fortescue has fallen some 7% in the past 10 trading days. I believe Fortescue is lagging behind the spot price and may present an opportunity for investors in the short term.
