Shareholders of S&P/ASX 200 Index (ASX: XJO) mining shares, beware. The iron ore price could be in for more trouble, according to one leading broker.
Some of the ASX 200's biggest miners are involved in producing iron ore, such as BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), Fortescue Metals Group Ltd (ASX: FMG), and Mineral Resources Ltd (ASX: MIN).
Any changes in the iron ore price can have an impact on their profitability. It costs roughly the same each month to extract one million tonnes of iron ore out of the ground, so any extra revenue the miners get for that production largely adds to net profit before tax (NPAT).
But it's the same in reverse. When the iron ore price goes down, the fall in revenue largely wipes off the net profit.
So, it wouldn't be good news for the ASX 200 mining shares if the iron ore price were to fall.
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Iron ore price tipped to drop
The broker Citi has suggested the bounce back of the iron ore price above US$100 is likely to be "unsustainable", according to reporting in The Australian.
Citi referred to China's recent confirmation that steel output has been cut, though steel prices and steel mill margins have improved in the last week.
The Australian reported on the broker's pessimistic commentary regarding iron ore prices:
Iron ore has been experiencing a relief rally due to the tailwinds of improved steel margins, following a sharp rebound in rebar and HRC prices, but we believe that this rally is unsustainable, as demand is likely to remain under pressure in the absence of any meaningful supply response.
We maintain our view that there is unlikely to be a quick turnaround in steel demand from the property sector, as new starts remained weak.
In the meantime, the latest PMI data suggest that the manufacturing sector has slipped into weakness akin to the construction sector.
Additionally, property sales appear to be losing steam since April, after the initial pent-up demand dries out.
Citi noted that in prior years, a rapid decline in the steel margin has led to a reduction in steel production, which then hurt iron ore demand. Steel mills have recently reduced their production, according to The Australian.
What next for the ASX 200 mining shares?
Time will tell whether the share prices of BHP, Fortescue, and Rio Tinto go higher or lower from here. The iron ore price has been unpredictable in the last few years. Certainly, the early-2023 rise of the commodity to more than US$120 per tonne may have surprised some investors.
Meantime, each ASX miner is pursuing a strategy of diversifying its operations. BHP just acquired copper miner OZ Minerals, Rio Tinto is working on the huge copper project Oyu Tolgoi in Mongolia, and Fortescue is trying to create a global portfolio of green hydrogen production facilities.
Until iron ore becomes a smaller slice of their earnings, the share prices of these three ASX 200 mining shares could be heavily influenced by falls (and rises) of the iron ore price. We can see on the chart below how each of them has dropped since 19 April 2023 amid the decline in the commodity price.
