The iron ore price just posted its biggest-ever monthly gain. What's going on?

Are iron ore miners about to turn into dividend gold mines again?

Key points
  • Iron ore has been on a strong run, boosting the miners
  • BHP, Rio Tinto, and Fortescue have each risen around 20% in a month
  • China’s easing COVID restrictions could be a boost for the sector

ASX iron ore shares are benefiting from a higher iron ore price. This may be surprising to some investors because the price for the steel-making commodity seemed to be on the way down.

But, the iron ore price can be quite fickle – it can certainly rise very quickly. As reported by the Australian Financial Review, the Singapore iron ore futures rose to US$101 per tonne. This was a sizable gain from the late October low of US$76.45 per tonne.

At the same time, there are a number of changes afoot in China that may indicate COVID-19 restrictions are going to wind down and that, perhaps, COVID-zero may not be the nation's key aim. This could be a boost for the economy and iron ore demand.

Man standing in a mine with mining vehicles.

Image source: Getty Images

COVID rules change

According to reporting by CNBC, daily cases of COVID in China are "near all-time highs" yet some cities are taking steps to reduce COVID-19 testing requirements and quarantine rules.

Reportedly, COVID-19 testing booths have been removed in Beijing. Meantime, Shenzhen has updated its rules, as other cities have done, to state that commuters don't need to test negative to travel. Chengdu and Tianjin are among other big cities that have made similar moves.

CNBC also reported that "China is set to further announce a nationwide reduction in testing requirements as well as allowing positive cases and close contacts to isolate at home under certain conditions", according to Reuters sources.

CNBC also reported that Chinese leader Xi told EU officials the Omicron variant was less deadly and this could mean fewer COVID restrictions.

According to CNN, Vice Premier Sun Chunlan reportedly told state news agency Xinhua:

With the decreasing toxicity of the Omicron variant, the increasing vaccination rate and the accumulating experience of outbreak control and prevention, China's pandemic containment faces a new stage and mission.

These different elements seem to signal a major shift for China, which could be a boost for the iron ore price and the ASX iron ore shares of BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), and Fortescue Metals Group Limited (ASX: FMG).

Over the past month:

  • Fortescue shares are up 24%.
  • BHP shares are up 19%.
  • Rio Tinto shares are up 21%.

Expert view on the iron ore price

The AFR also reported comments by Citi which suggested there could be further optimism for the iron ore price:

Policy tailwinds are likely to remain in favour of the bulls in the short term.

A perceived U-turn in China's Covid policy and the country's efforts to shore up the beleaguered property sector drove an iron ore price rally during November.

We expect further improvement in reopening sentiment. However, we maintain our view that the physical fundamentals will remain weak in the near term.

According to Commsec, the Fortescue share price is priced at 10 times FY23's estimated earnings, the BHP share price is valued at 15 times FY23's estimated earnings, and the Rio Tinto share price is valued at nine times FY23's estimated earnings.

While those price/earnings (P/E) ratios aren't exactly high, I'm not sure how the iron ore price will perform, or for how long it will be affected. I also think it may be better to wait for a lower iron ore price when buying a cyclical business like an ASX iron ore share.

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. 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 Scott Phillips.

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