The iron ore spot price has displayed a rapid descent in the past 6 weeks. This has sent ASX 200 miners BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Fortescue Mining Group Ltd (ASX: FMG) to at least 6-month lows.
However, the iron ore spot price has just logged a three-day winning streak, a much-needed bounce from what is otherwise a 25% fall in just six weeks. But the question remains, is this just a temporary bounce or a sign of life for iron ore miners?
I believe the current macroeconomic and geopolitical picture is quite bleak for miners to find any hopes of returning to former highs. In BHP's full-year announcement on Tuesday, 20 August, it suggested that "any further escalation in trade protection or loss of business confidence is a downside risk for consensus views of the world economy, commodity demand and energy and metals prices in the 2020 financial year". BHP displayed mixed feelings about the global economic outlook with a slowing Chinese economy that is expected to be offset by easier monetary and fiscal policy, a strong US performance offset by uncertainty in the near-term and slowing European and Japanese economies that are expected to have modest growth next year.
While iron ore miners have shown some consolidation in share price in the past week or two, I believe there is still significant downside to the iron ore spot price. Prices initially surged due to reduced global supply after a tailings dam disaster in Brazil in January and a cyclone in Australia. The supply hit, combined with Chinese steel makers hitting record production, lifted the spot price by more than 50%.
Today, we are seeing the opposite in both demand and supply. The world's largest miner, Vale SA, which was in the spotlight of the tailings dam disaster has recently received court approval to resume production at a number of mines. This will see supply slowly return to pre-disaster levels. Furthermore, Chinese steel output is easing on environmental production laws, shrinking margins and anticipation that spot prices will go lower. I believe these factors will cause a further deterioration in the iron ore spot price.
The overnight trading session on Friday witnessed US-China trade tensions further escalate with China slapping $75 billion worth of tariffs on US goods, while President Donald Trump tweeted that American companies are "hereby ordered to immediately start looking for an alternative to China". The very geopolitical and "trade protection" fears that BHP had cited in its full-year announcement are taking shape. To me, this points to further share price pain and lower iron ore spot prices.
