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Iron ore slumps: Does this make the BHP (ASX:BHP) share price and other miners a buy? 

man scratching his head as if asking whether the bhp share price is in the buy zone
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The iron ore spot price fell sharply this week following rising port inventories and signs that supply has caught up to the strong demand from China. This has caused the Fortescue Metals Group Limited (ASX: FMG) share price to slump 7.5% last week while the more diversified commodity portfolios of Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP) saw their share prices flat for the week.  

Is this the top for iron ore? 

Iron ore prices have been able to enjoy the merits of tight supply conditions and soaring demand from China. China’s industrial output increased at its fastest pace this year in August, while crude steel production set a monthly record high. Infrastructure and property investment seem to be the key drivers for China’s economic recovery. It estimates that it will finish 2020 with a GDP growth of approximately 2%, outperforming all its G20 peers. 

While this is a positive signal for iron ore, the tides are slowly turning as inventories and steel stockpiles continue to rise in China. Iron ore prices have soared to levels only seen when global supply took a hit following the tailings dam disaster in Brazil. The higher cost of raw materials combined with increasing inventories may see demand settle in the near-term.

From a supply side perspective, Brazilian miner Vale has operationally struggled to meet its guidance amidst COVID-19 and challenging weather conditions. On Wednesday, the company announced that it expects to reach an iron ore capacity of 400 million tonnes per year by increasing output across its operations, including the state of Minas Gerais, the location of the deadly dam disaster in 2019. It is currently producing 318 million tonnes per year, and before the dam disaster in 2019, it produced 385 million tonnes. A recovery in seaborne supply from Vale could further cool down the iron ore price, and adversely impact Fortescue, and to a lessor extent the Rio Tinto and BHP share price. 

Is this bad for the Fortescue share price?

Fortescue is a pure iron ore play which is why its share price has been more adversely affected by iron ore pullback. The improvement in production and exports out of Brazil, combined with the strong Australian dollar could weaken the profitability of Fortescue for FY21. However, even if iron ore prices were to fall back to US$80 per tonne, Fortescue would still be a highly profitable company with the ability to pay market leading dividends.

Could the Rio Tinto or BHP share price be better value?  

While the top might be in for iron ore, other commodities in Rio’s and BHP’s portfolios have been booming. Copper prices are at an almost five-year high, with coal at a one-year high and crude oil holding steady at US$40. I believe the Rio Tinto and BHP share price represent fair value at today’s prices, and could be worth a closer look once the near-term volatility subsides. 

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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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