Why ASX iron ore stocks are set to rally today

The S&P/ASX 200 Index (Index:^AXJO) is set to open higher and it’s the ASX iron ore miners that are likely to lead the charge this morning.

| More on:
iron ore ASX rally outlook

Credit: iStock

ASX bulls rejoice! The market is set to open higher and it’s the ASX iron ore miners that are likely to lead the charge this morning.

The futures market is pointing to a 0.6% jump in the  S&P/ASX 200 Index (Index:^AXJO) at the open as risk taking fuelled another big jump in the iron ore price.

The price of the steel making ingredient surged 5.8% to US$145.01 a tonne on Friday evening, reported the Australian Financial Review.

Why iron ore prices are surging

It isn’t only promising COVID‐19 vaccine news that’s bringing out the animal spirits for the commodity. The US federal government appears closer to unleashing a new round of economic stimulus that could be worth around US$1 trillion before year end.

Then there is the economic rebound in China, which is the largest buyer of Australian iron ore. The Asian giant is about the only major economy that can boast about a V-shaped recovery.

Rally favours smaller ASX iron ore stocks near-term

That only means more good news for the BHP Group Ltd (ASX: BHP) share price, the Rio Tinto Limited (ASX: RIO) share price and the Fortescue Metals Group Limited (ASX: FMG) share price.

But I won’t be surprised to see the smaller marginal ASX miners benefit more. Rising commodity prices tend to favour these stocks more. These stocks include the Mount Gibson Iron Limited (ASX: MGX) share price and Deterra Royalties Ltd (ASX: DRR) share price.

On the flipside, the big run up in the iron ore price over a short timeframe is causing some to question if the rally is sustainable.

After all, what goes up quickly has a tendency to tumble suddenly.

Why the iron ore price can go higher

But the iron ore run may be more enduring than sceptics believe. Firstly, Vale SA’s production guidance downgrade for 2020 and 2021 clears the way higher for Australian producers. The Brazilian rival is struggling to restore output to pre-COVID levels because of the pandemic.

Even if a vaccine is available today, it will take considerable time for it to be available to the masses.

Meanwhile, demand for iron ore, particularly from China, is likely to increase as its economic recovery gathers pace. Also, the Chinese government needs the ore to build its military capabilities. Thank goodness it doesn’t have alternative suppliers for iron ore as Australia supplies around 60% of its market.

Other tailwinds supporting ASX iron ore stocks

Thirdly, currency forecasters are tipping further weakness in the US dollar in 2021. The massive stimulus that the US will have to undertake under new President Biden to restore growth will weaken the greenback.

A weaker US dollar usually means higher commodity prices as commodities are priced in the US currency.

Finally, history bodes well for the iron ore price. Analysts have repeatedly underestimated the strength in the commodity. There’s no reason to think the pessimists have got it right this time – at least not in the shorter-term.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Deterra Royalties Limited, and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Top 10 - asx shares today
Share Market News

Here are the top 10 ASX shares today

Today, the S&P/ASX 200 Index (ASX: XJO) fought back against the selling pressure throughout the day to finish in the green. …

Read more »

The word inflation written with a ticking time bomb.
Share Market News

Why is it when Jerome Powell sneezes, the ASX 200 catches a cold?

Key points The ASX 200 took a hit following comments from the United States Federal Reserve chair Jerome Powell Expectations …

Read more »

A female financial services professional with a manicured black afro hairstyle turns an ipad screen to show a client across the table a set of ASX shares figures in graph format
Bank Shares

Goldman tips Bank of Queensland (ASX:BOQ) share price to rise 25%

If you’re interested in gaining exposure to the banking sector, then it could be worth considering Bank of Queensland Limited …

Read more »

An arrow going upwards with a road sign saying 'IPO ahead'.

New listing mania: Could 2022 be another record year for ASX IPOs?

Key points The IPO outlook for 2022 is optimistic Last year saw the highest number of new floats on the …

Read more »

An oil miner with his thumbs up.
Energy Shares

Why are AGL (ASX:AGL) shares having such a stellar start to 2022 while the ASX 200 is struggling?

Key points AGL was one of the worst performing ASX 200 shares of 2021 But 2022 has given this company …

Read more »

share price dropping
Share Fallers

Why AnteoTech, Newcrest, Nitro, and ResMed shares are falling

In late trade, the S&P/ASX 200 Index (ASX: XJO) is on course to end the week with on a positive note. …

Read more »

blue arrows representing a rising share price ASX 200
Share Market News

These 3 ASX 200 shares are topping the volume charts this Friday

Finally, a day of green for ASX shares! The S&P/ASX 200 Index (ASX: XJO) is bouncing back strongly today, after a …

Read more »

surprised asx investor appearing incredulous at hearing asx share price
Broker Notes

Top broker sees 43% upside for the Westpac (ASX:WBC) share price

Key points The Westpac share price is down 24% from its highs Morgans believes this has created a buying opportunity …

Read more »