The iron ore price is dropping and this is hitting the valuation of miners. For example, over the last two trading sessions, the Fortescue Metals Group Limited (ASX: FMG) share price is down 8%. BHP Group Ltd (ASX: BHP) shares are down 1.3%, and the Rio Tinto Limited (ASX: RIO) share price is down 2.5%.
One thing to remember with commodity businesses is that they are heavily reliant on the commodity price for short-term profitability and investor sentiment.
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Why the iron ore price matters
Think about this – if it costs a miner US$20 to produce one tonne of iron ore and it can sell that iron for US$100 per tonne, then that's a good amount of operating profit for the miner. If the iron ore price rose to US$110 per tonne, but it still costs US$20 to produce one tonne, then that extra US$10 is mostly extra profit for the business, aside from paying more to the government.
But, the same is true when the commodity falls in value. A reduction of US$10 per tonne would largely cut into net profit.
What's happening?
According to reporting by Bloomberg, on Tuesday the iron ore price in Singapore dropped 2.8% lower to US$94.25 per tonne.
The news outlet noted that the start of China's peak construction for infrastructure and steel-related demand is usually in September and October. But, the resurgence of the iron ore price hasn't occurred.
Bloomberg reported that the Chinese economy is dealing with a downturn in housing as well as COVID-19 lockdowns. Real estate developers reportedly saw new home sales decline by a quarter in September.
Steel mills are apparently only buying what they need, rather than restocking, according to reporting by Bloomberg.
Analyst Kamal Ailani at Dow Jones business McCloskey by OPIS suggested that the iron ore price could fall further from here. However, it's still "well supported around $85 a tonne". If it were to drop below that price, smaller iron ore miners may need to reduce production because of higher costs.
Are the ASX iron ore mining shares an opportunity?
I think it's a good idea to consider the cyclical nature of the iron ore price, and most commodities.
It's impossible to say when a commodity price will see a downturn. Or an upswing.
But, I do think that declines can prove to be buying opportunities with resource businesses. Iron ore is an important part of steelmaking. Steel has many uses, though its demand isn't going to be consistent every single month.
If the iron ore price goes below US$90 per tonne, I think this could cause iron ore miners to drop in value as well. Even at a lower price, I think Fortescue shares, BHP shares and Rio Tinto shares are all capable of producing decent dividends for shareholders at a lower iron ore price while investors wait for another upswing.
I'm a shareholder in Fortescue because of its green energy efforts, namely green hydrogen.
I think BHP is attractive because of its diversified portfolio, which includes copper, nickel, potash and coal. However, it did just lose a High Court appeal. The appeal was to "block shareholders who are not Australian residents from participating in a class action against the company," according to reporting by the ABC.
Rio Tinto shares could be an opportunity as well, as the miner increases its participation in decarbonisation-linked commodities with copper and lithium exposure.
