Chinese iron ore futures have fallen more than 10% in the past five trading sessions. This has sent all ASX miners tumbling from glorious highs to at least two-month lows.
On Tuesday, iron ore miners demonstrated some consolidation with the BHP Group Ltd (ASX: BHP) share price down 0.75% to $37.10, Rio Tinto Ltd (ASX: RIO) down 0.11% to $91.39 and Fortescue Metals Group (ASX: FMG) up by 2.82% to $7.29. In today’s trade, all three have fallen between 1 and 2%, to be trading for $36.66, $89.65, and $7.12, respectively.
In my previous article on this topic, I suggested that the ASX iron ore miners had reached their peaks; however, I underestimated the speed at which they would retrench.
What’s behind the iron ore spot price falling?
The iron ore spot price has taken a nose-dive from a high of approximately US$123 per tonne to US$98. However, on one hand, demand-side fundamentals remain relatively robust, as global crude steel output for the six months through June rose 4.9% on the year to an all-time high of 925.06 million tonnes. Perhaps more importantly, China has maintained steel production at record levels, despite thin steel margins. A continuation of strong demand-side consumption should buoy the iron ore price in the short term.
What greatly undermined the trajectory of the iron ore spot price was the announcement that the world’s largest iron ore miner, Vale SA, was going to resume production at a number of mine sites that had been affected during its dam disaster.
It is somewhat of a numbers game when it comes to iron ore. The global iron ore output is at approximately 1.7 billion tonnes per annum, while the Vale disaster took away around 90 million tonnes from annual production. The disaster highlighted a tight iron ore market that is vulnerable to pivots in supply or output. As Vale returns to form, the iron ore spot price should normalise.
Investors should pay close attention to Chinese steel production figures that may act to buoy the rise in iron ore output. Furthermore, it is important to pay attention to how the US and Australian market moves in the coming days as it will indicate whether or not recent moves are just a correction or represent a full change in structure. While I believe that the iron ore miners are oversold in the short term, global iron ore output is expected to reach an equilibrium, which will bring further weakness for our miners.
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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. 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.