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Why BHP and Rio Tinto are underperforming the ASX 200 today

Shares in our iron ore majors are missing out on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) market rally this morning as the latest Chinese trade data released over the weekend caused the iron ore price to tumble.

Ironically, the trade data wasn’t as bad as what investors were expecting and this is why the top 200 index jumped 0.6% when the BHP Group Ltd (ASX: BHP) share price dipped 0.7% to $37.04, the Rio Tinto Limited (ASX: RIO) share price reversed 1.6% to $93.68 and the Fortescue Metals Group Limited (ASX: FMG) share price tumbled 2.8% to $9.31 at the time of writing.

While Chinese exports are holding up reasonably well despite the ongoing trade war, iron ore imports into the country fell in October for the first time in four months.

Iron ore imports fall for first time since June

The price of the commodity tumbled 2.7% to US$80.36 a tonne on the news and experts blame shrinking profit margins of Chinese steel producers for the dour reading. Steel demand tends to wane during the country’s winter months as construction activity slows.

Elevated smog levels across a number of big cities are also adding to the gloomy outlook for the material as the Chinese government could be compelled to tighten environmental restrictions on steel production.

Imports of the steel making ingredient fell 6.5% in October to 92.86 million tonnes, according to data from the General Administration of Customs. The sliver lining is that last month’s imports were up 5% from 88.4 million tonnes brought in a year earlier.

Inventories up, production down

Rising iron ore inventory at China’s ports, hovering around a six-month high, is also weighing on both futures and spot prices, reported Reuters.

Some analysts believe the pain will intensify for our iron ore producers. The analysts at Westpac Banking Corp (ASX: WBC) is forecasting the benchmark price for 62% grade iron ore is forecast to fall to US$65 a tonne.

Reuters quoted Justin Smirk, a Westpac senior economist as saying: “We expect prices to continue to decline in 2020 as supply recovers post Brazilian disasters, while demand subsides as Chinese property investment moderates.”

Sudden turn in sentiment

Sentiment has turned on a dime. It was only a few weeks ago that the iron ore bulls were in charge on expectations that the Chinese government would not impose strict conditions on its steel industry as authorities combat slowing economic growth.

The communist party was also tipped to increase stimulus of offset the loss of growth from its ongoing trade battle with the United States.

Perhaps a more positive read on a potential trade truce between the world’s two largest economies is tempering expectations of Chinese stimulus.

However, given the unlikeliness of a meaningful de-escalation in the tariff war, I think it’s too soon to be throwing in the towel for BHP and Rio Tinto.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and Westpac Banking. Connect with him on Twitter @brenlau.

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.

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