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How COVID-19 is helping ASX iron ore majors like BHP outperform today

Mining shares

The S&P/ASX 200 Index (Index:^AXJO) may have slipped into the red this morning, but the BHP Group Ltd (ASX: BHP) share price is getting a boost at the expense of a rival.

It isn’t only BHP that’s benefitting. While the stock jumped 1.3% to $31.69 in morning trade, the Fortescue Metals Group Limited (ASX: FMG) share price rallied 1.8% to $11.48, while the Rio Tinto Limited (ASX: RIO) share price is trading at breakeven.

Rio Tinto’s shareholders shouldn’t be disappointed give than the ASX 200 lost 0.4% at the time of writing.

Vale’s production downgrade

Our iron ore miners can thank the misadventures of their key rival Vale SA. The Brazilian miner downgraded its full year production guidance over the weekend, reported the Australian Financial Review.

Vale was hoping to produce 340 million to 355 million tonnes of iron ore fines this calendar year. But it cut its production estimates by between 7% and 9% due in part to COVID-19.

The coronavirus pandemic caused disruptions to logistics but that isn’t the only reason for the downgrade.

Factors weighing on Vale

Heavy rains in Brazil at the start of the year and an unexpected outage at Vale’s flagship S11D operations also added to its woes.

Further, Vale is still struggling to secure government approvals to restart some of its operations following the tragic Brumadinho dam disaster in January 2019.

The production shortfall from the major iron ore exporter is welcomed news for ASX miners, although Rio Tinto won’t benefit quite as much as its peers.

Why Rio Tinto is underperforming

This is because Rio Tinto had to downgrade production in February due to tropical Cyclone Damian. This might explain the miner’s lacklustre share price performance today.

The production misfortunes from Vale and Rio Tinto may also explain why the iron ore price is holding up so well during the coronavirus meltdown. The price of metals, such as copper, have plunged in comparison.

Biggest winners

Meanwhile, Fortescue is making the most of the situation. The miner is on track to deliver record export volumes this financial year.

BHP is another that is well placed to benefit as its production is yet to be materially impacted, although its exposure to the slumping oil price is an unfortunate distraction.

As long as the pandemic-fuelled global recession doesn’t spook our iron ore miners to become cash hoarders, these miners are in a good position to pay big dividends, and maybe launch a capital return or two.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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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