ASX 200 miners beware as UBS warns iron ore will sink under US$100 in 2022

Just as you thought it was safe to bargain hunt ASX 200 iron ore miners, a leading broker warns that …

| More on:
ASX 200 miners iron ore share price Graphic of a shark in the water with the word risk swimming towards a small person paddling a canoe, indicating risk ahead for ASX share price

Image source: Getty Images

Just as you thought it was safe to bargain hunt ASX 200 iron ore miners, a leading broker warns that the calm won’t last.

The share prices of ASX iron ore shares have been under strain recently as the price of the commodity tumbled from its peak.

The steel making ingredient was fetching over US$200 a tonne before crashing around 25% in three weeks.

ASX 200 iron ore miners finding renewed favour

Price of the ore seems to be stabilising at around US$150 a tonne. That’s prompting ASX investors to buy the Fortescue Metals Group Limited (ASX: FMG) share price, BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price.

These ASX shares not only delivered record or near record profits, but they are a key contributor to Australia’s $38 billion dividend bonanza this reporting season!

But this could be as good as it gets. UBS took a deeper look at what caused the iron ore price to sink from its record high and it believes the mineral is heading lower in the coming months.

Why iron ore was knocked off its perch

What sparked the rout was China’s decision to ensure the country’s steel production stayed flat in 2021.

If this comes to pass, Chinese crude steel production is set to fall 59 million tonnes in the second half of this year compared to the same period in 2020.

China’s pig iron output (a cheap substitute used to make low quality steel) is down around 6% in July compared to June. UBS also noted that key steel producers, including China Baowu Steel Group Corp., Ltd., have also announced plans to cut production in the current half.

Mixed signals cloud outlook

“This has resulted in mills destocking and iron ore prices falling sharply in a thin spot market,” said UBS.

“Other policy developments are mixed: the govt remains focused on controlling the leverage of developers and property prices but is taking measures to accelerate infrastructure construction.

“This has resulted in steel prices lifting while iron ore prices fall.”

Another mixed outcome is iron ore output. Exports of the commodity have not yet lifted materially from Australia or Brazil, although Vale SA and Rio Tinto’s guidance suggest supply will increase by circa 60Mt in this half.

ASX 200 miners brace for more iron ore pain

“We expect the China’s steel curtailments to be targeted in 4Q when demand slows seasonally and air pollution is in focus (especially ahead of the Winter Olympics in Feb-22),” said UBS.

“And as a result, we expect prices to stabilise in Sept/Oct before continuing to fall back <$100/t in 2022.”

Foolish takeaway

If the broker is right, we could see ASX 200 iron ore miners come under renewed pressure in the coming months.

The silver lining is that analysts and governments don’t have a very good track record in forecasting commodity prices. ASX investors will be hoping this remains true.

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, Fortescue Metals Group Limited, and Rio Tinto Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. 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 Resources Shares