ASX iron ore miners are likely to extend their recent rally this morning but UBS is ringing the bell on the peak of the commodities supercycle.
Rising steel prices and positive leads from Wall Street are expected to keep the BHP Group Ltd (ASX: BHP) share price and Fortescue Metals Group Limited (ASX: FMG) share price well supported.
But these stocks may not be able to outperform the S&P/ASX 200 Index (Index:^AXJO) in 2021 with UBS downgrading the sector to "market weight" from "overweight".
Has the commodities supercycle past its prime?
What's more, the main focus of the across-the-board downgrade in ASX mining shares is iron ore.
"In our opinion, the macro & fundamental backdrop for industrial commodities is robust and we expect commodity prices to remain at elevated levels in 2021," said UBS.
"However, we see 2021 as the top of the cycle for most major commodities, not the start of a multi-year rally in commodity prices."
ASX iron ore shares experiencing metal fatigue
The sombre outlook for ASX miners is driven by commodities demand from Australia's largest and most important customer – China.
Unlike the supercycle at the start of this century and during the GFC, UBS thinks Chinese demand cannot be sustained this time.
Credit growth in China is slowing and authorities there have implemented restrictions on the property to cool the sector.
3 headwinds buffeting ASX iron ore shares
The iron ore price is tipped to take the brunt of the hangover. Supply from Brazil is recovering and UBS estimates shipments from that country are up 17% year-to-date.
The broker also pointed out that iron ore inventories at Chinese ports and steel mills are building. It's not yet causing a big concern, but it shows that the tightness in supply is easing.
Further, new pollution control restrictions imposed by the Tangshan local government on steel production is also adding pressure.
While UBS doesn't believe the controls are enough to make a material impact on steel output (and hence iron ore demand), the policies add an extra downside risks for the market.
Broker downgrades these ASX iron ore shares
Based on these expected headwinds, UBS downgraded its "buy" recommendation on both the BHP share price and Fortescue share price.
These ASX shares are moved to "neutral", along with fellow iron ore giant, the Rio Tinto Ltd (ASX: RIO) share price.
But it isn't all bad news for the sector. While iron ore is out of favour, the broker is urging investors to go overweight on metals used in the manufacture of batteries.
"We expect met-coal & battery raw materials (lithium, cobalt, graphite & rare earths) prices to climb higher in 2021," added UBS.
"The return of the consumer should also favour mineral sands (zircon & feedstock)."
