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With Rio Tinto lifting spending, is it time to buy ASX iron ore miners?

The S&P/ASX 200 (INDEXASX: XJO) iron ore miners have lifted spending across the board, signifying the industry’s confidence in the iron ore demand. The iron ore spot price has improved to around US$84 per tonne while the Australian dollar sits at near record lows of 68 cents. Could now be the time to buy ASX 200 iron ore miners? 

A lift in investment 

Rio Tinto Ltd (ASX: RIO) announced that it will invest $749 million in its existing Greater Tom Price operation to help sustain the production capacity of its world-class iron ore business in the Pilbara of Western Australia. This lifts Rio’s collective spending on iron ore projects in Australia to more than $4 billion. Likewise BHP Group Ltd (ASX: BHP) is spending more than $3 billion on its South Flank mine while Fortescue Metals Group Limited (ASX: FMG) is investing more than $3 billion in 2 projects – Eliwana and Iron Bridge Magnetite.

What about demand?

Iron ore demand and steel production is driven by the world’s largest economy, China. Factors such as a slowing economy, anti-smog regulations and weaker profit margins at steel mills all contribute to lower Chinese steel production.

However, the strength in the real estate sector could buoy steel demand. According to the National Bureau of Statistics of China, its property investment rose 10.3% in the first 10 months of 2019. Beijing has ramped its investment to boost infrastructure projects to help the slowing economy. This push for greater infrastructure could be key in China’s appetite for steel. 

Is there still a supply imbalance?

There were initial fears that the worlds largest iron ore miner, Vale SA, would return to production form following the collapse of its tailings dam. While Vale did receive court approval for the restart of its Brucutu mine earlier this year, the company still faces production headwinds and safety concerns. At the beginning of November, Vale said that it had received authorisation to restart production at its Alegria mining site. This follows another interruption in March after a stress test failed to guarantee its stability. The company has announced that it expects sales of iron ore and pellets of between 307 million and 312 million tones in 2019, a 14.7% decline from last year.

Vale said in a recent conference call with investors that it expects to restore all of the lost production in 2020 and 2021, potentially raising its annual production to around 400 million tonnes.

Foolish takeaway

Iron ore miners should enjoy favourable supply/demand conditions as margins continue to benefit from the record-low Australian dollar. Ultimately, the industry will face medium-long term headwinds as Vale returns to form.

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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.

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