A large portion of the Australian economy is reliant on tourism and high value exports such as tertiary education. With the coronavirus pandemic effectively shutting down the majority of the economy, Australia’s mining sector has remained a pillar of strength.
So, will the surging price of iron ore help the Australian economy recover faster?
Why is the iron ore price surging?
With economic fears of the coronavirus pandemic subsiding, the iron ore spot price has surged more than 10% since the end of April and is currently trading above US$91 a tonne. The iron ore price has surged on the back of stronger than expected demand from China and weak supply from exporters in Brazil.
Earlier this year, the pandemic triggered fears as steel stockpiles in China surged due to subdued construction demand. However, as construction projects have restarted in China the country’s steel surplus has been absorbed. In addition, the potential for infrastructure stimulus has also strengthened the demand side.
In addition to stronger demand, the rapid spread of coronavirus cases in Brazil has impacted the country’s output. Brazil has long been the world biggest producer of iron ore, however a dam collapse last year resulted in tighter restrictions being placed on mines. Surging coronavirus cases in the country have also raised concerns about future iron ore supply.
How have iron ore miners performed?
Iron ore miners on the ASX have outperformed in 2020 despite the tumultuous conditions of financial markets. Fortescue Metals Group Limited (ASX: FMG) has seen its share price surge almost 30% for the year and is currently trading at all-time highs. Mining giants BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have also seen strong demand with their share prices bouncing 44% and 28%, respectively, from their lows in March.
The Australian mining sector was partially immune to the coronavirus lockdown with workers allowed to commute for work. In addition, coronavirus transmission in the iron ore producing heartland of Western Australia remains low.
According to the Minerals Council of Australia, iron ore exports are the largest source of export revenue in Australia, contributing $63 billion in 2017 to the economy. Iron ore producers in Australia are poised to benefit and provide a boost to the local economy as they dominate supply for recovering Chinese demand.
In addition to the economy, the ASX 200 iron ore miners could also provide value to shareholders. With companies in the banking sector slashing dividends, iron ore miners could fill the income void by matching or increasing their payouts.
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As of 7/4/2020
Motley Fool contributor Nikhil Gangaram 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.