Despite lacklustre economic data, the ASX 200 iron ore miners have slowly pushed higher after their August lows. The iron ore spot price has stabilised around the US$90 per tonne level. This has supported the BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) share price.
What is the outlook for iron ore?
Iron ore futures are looking stronger after Brazil's Vale closed its tailing dam earlier this month. It was only a few months ago that Vale had received court approval to resume production at a few of its mine sites and upgraded its iron ore guidance. However, the iron ore giant has now temporarily closed its tailing dam to assess the structure's "geographical characteristics". This was followed by a reduction in its full year iron ore and pellet sales guidance. This news should continue to support a higher iron ore spot price.
On the supply front, China's monthly crude steel output has slid to 6-month lows in September. This slowdown was not due to demand factors, but production curbs introduced by the government to clean the air in Beijing and other major northern cities.
China has released mixed economic data. Construction-related heavy industrial sectors grew modestly with cement production rising by 4.1% year-on-year (down from 5.1% in August). Consumer electronic products rose strongly, up by 11.4% year-on-year in September. However, car production was weak, with output falling 6.9% year-on-year in September. This marks the 15th month of falling car production.
Besides the mixed feelings for lagging indicators. The expectation is that major Chinese steel-makers will continue to increase steel production as the government ramps up infrastructure investment. This stimulus aims to prop up China's growth in the midst of headwinds from the trade war.
Foolish takeaway
I believe the general market is showing signs of strength, while trade-war fears are largely subdued (for the time being). The low Australian dollar also further supports iron ore margins. With the likelihood of another RBA rate cut on the horizon, this will further benefit domestic miners.
The ASX miners are not far off their yearly highs, but the iron ore sentiment could easily be derailed by Vale resuming production, rising trade war tensions and/or worsening economic data. I believe there could be a short-term opportunity to capitalise on the good news. But the risk/reward may not be good in the medium to long term.
