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.

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iron ore ASX rally outlook

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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.

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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.

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