Bank of America flags more headwinds for ASX 200 iron ore shares

China is the world's largest importer of iron ore.

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Investors in S&P/ASX 200 Index (ASX: XJO) iron ore shares will have welcomed the 17% boost in iron ore prices overnight.

At time of writing, iron ore is trading at US$109 (AU$151) per tonne.

The lift is largely accredited to massively indebted Chinese property giant China Evergrande Group (HKG: 3333) coming through with today's interest payment to bond holders, despite wide expectations of a default.

Today's payment doesn't get Evergrande out of hot water though. The company has some US$300 billion worth of liabilities outstanding.

Despite the 17% lift in iron ore prices, the ASX 200 iron ore miners haven't seen their shares dramatically react.

In afternoon trading the Fortescue Metals Group Limited (ASX: FMG) share price is up 0.55%, the Rio Tinto Limited (ASX: RIO) share price is up 0.4% and the BHP Group Ltd (ASX: BHP) share price is heading the other way, down 0.6%.

ASX 200 investors may be hesitant to snap up what some brokers perceive as a bargain, fearing iron ore's retreat from record highs of US$220 isn't over yet.

Indeed, according to analysts at the Bank of America, the key steel making metal may have a lot further to fall.

Three miners stand together at a mine site studying documents with equipment in the background.

Image source: Getty Images

What is Bank of America forecasting for iron ore?

"All the king's horses and all the king's men unlikely to put iron ore together again", BofA wrote in a note, forecasting iron ore could sink more than 35% from current prices, down to US$70 per tonne.

According to the bank's global commodities team (quoted by the Australian Financial Review):

China's steel production has fallen by 12.6 per cent in August as authorities have required steel mills to reduce output over emissions. With the Olympics just around the corner and several steel production hubs in close vicinity to Beijing, it is highly likely that the current curbs will prevail into 2022…

[O]ur colleagues in China's steel team expect a drop in crude steel production of 1.4 per cent year over year next year. As iron ore shipments are rising, the price of the feedstock will in all likelihood face headwinds in the coming weeks and could cut well into the cost curve, with $US70 a tonne possible.

Now, US$70 appears to be the bank's worst case scenario.

The Bank of America estimates an average price of US$91 per tonne for iron ore in 2022.

That's still well above extraction and production costs for the ASX 200 miners.

How have these ASX 200 iron ore miners been performing?

The ASX 200 iron ore giants have struggled this year.

BHP's shares are down 11% in 2021. Rio's share price is down 14%. And the Fortescue share price is down 37%.

The ASX 200, on the other hand, is up 10% year-to-date.

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.

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