The iron ore spot price has stabilised around the US$120 per tonne mark while the S&P/ASX 200 (INDEXASX: XJO) index has just passed 6,800. This is in stark contrast to the ASX iron ore miners, which have struggled on the news that the world's largest miner, Vale SA, would resume production at its Vargem Grade complex.
This news has resulted in the following price movements in the past week:
- BHP Group Ltd (ASX: BHP) share price down 1.07% to $40.56 (at time of writing)
- Fortescue Metals Group Ltd (ASX: FMG) share price down 4.6% to $8.30 (at time of writing)
- Rio Tinto Limited (ASX: RIO) share price down 4% to $98.26 (at time of writing)
Is this a buy opportunity?
The iron ore bull run is perhaps at its cross roads as Vale SA slowly returns to form. The Brazilian miner said that the move to Vargem Grade will add approximately 5 million tonnes to annual production. We've known for a long time that Vale has been awaiting supreme court approval for the resumption of production at several mine sites.
Last month, Vale SA received court approval to enable the full resumption of wet processing operations at its Brucutu mine. Brucutu has an annual production capacity of approximately 30 metric tonnes per annum (Mtpa) of iron ore. This represents 8% of Value's annual output. Fast forward to today, and the Vargem decision will enable the partial resumption of dry processing operations, which will total approximately 5 Mt of additional production in 2019.
If we piece together the initial statistics of the Vale disaster that resulted in a loss of approximately 90 million tonnes of an annualised supply of around 1.7 billion tonnes, it appears as though the market is very slowly coming back to equilibrium.
The plateauing bullish fundamentals overshadow Fortescue's June 2019 quarterly production report, which highlight a 22% rise in total ore shipped while citing sustained strong demand from customers.
Foolish takeaway
I believe the recent falls in BHP, Rio Tinto and Fortescue share price are, to some degree, a market overreaction. However, I am going to make the bold call that the top is in for ASX iron ore miners.
On one hand, demand side fundamentals remain robust and the supply–demand imbalance will continue to persist in the short term. But it is evident that the market is slowly creeping back to an equilibrium and I find it highly unlikely that ASX iron ore miners will break out their old highs.
