What stage in the cycle are ASX iron ore shares (and are they a buy)?

Are iron ore miners closer to the end or beginning of the boom-bust cycle?

| More on:
Man in yellow hard hat looks through binoculars as man in white hard hat stands behind him and points.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are ASX iron ore shares worthy of a spot in the portfolio these days? The mining cycle might shed some light on the possibilities without needing a crystal ball.

A studious investor can make a mint by understanding the various stages of cyclical companies. Cycles are by no means definitive — parts of them can go on longer than expected — but they can provide an approximate marker of where we are within the circular journey.

The question is: Are we in a stage of the cycle that supports buying ASX iron ore shares?

Round and round we go

We need to know the various stages before figuring out which part of the cycle we might be in.

A recent article from boutique investment manager Atlas Funds Management broke it down into five stages. I've taken the liberty of condensing it all into one memorable acronym: DENTS

Demand: During this stage, higher demand for the commodity is met by a stable supply. The industry will still be recuperating from the previous 'bust' and will lack any spare capacity. Additionally, management is cautious about increasing supply at the risk of weighing down prices.

Expansion: Stage two brings renewed confidence. By this point, miners have been running at maximum capacity for an extended duration, with prices remaining economical. Companies will begin investing in bringing new production to life again.

As noted by Atlas, mergers and acquisitions tend to increase at this stage. Buying out a competitor can allow an ASX iron ore share (or any other miner) to grow production quicker than undergoing the entire development process.

New supply: In stage three, the rush is on to make hay while the sun shines. Every miner and their dog expands production. The flood of new supply overflows the previously insatiable demand, weakening the commodity price.

Despite weaker prices, new projects often keep upping production to meet their debt repayments on financed developments. A downward price spiral can emerge rather quickly.

Trimming: In the fourth stage, it's clear prices are no longer economical for high-cost operations. A telltale sign of the deteriorating situation is when mining services contractors lower their prices in a bid to keep making at least some money.

The big dogs of the sector may begin cutting dividends to strengthen their balance sheets.

Survival: This is the end of the road. Only the low-cost, high-grade projects are left standing, while many others are forced to place their sites into care and maintenance. Even quality operations will begin scaling back to conserve capital in anticipation of a long winter.

Is it a good time to buy ASX iron ore shares?

How long is a piece of string?

Whether now is the time to buy ASX iron ore shares depends on future supply and demand. Views are conflicted here.

Miners such as Fortescue Ltd (ASX: FMG), BHP Group Ltd (ASX: BHP), and Rio Tinto Ltd (ASX: RIO) have reduced their dividend payouts from 2022 highs — a characteristic of the late 'trimming' stage.

However, some believe iron ore is set for a multi-decade supply shortfall. If true, we might still be in the first stage of the cycle. Meanwhile, others are more wary of the demand side of the equation.

China reportedly began cutting steel production last month as iron ore inventories pile up. Liberum senior commodities analyst Tom Price said, "It's hard to build a bullish case for iron ore over any time horizon at the moment."

The going price of iron ore is down 22% year-to-date at US$108.8 per tonne.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. 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.

More on Resources Shares

A man closesly watch a clock, indicating a delay or timing issue on an ASX share price movement
Mergers & Acquisitions

BHP shares charging higher as the clock ticks down on the Anglo American takeover

BHP has less than three days before the clock runs down on its $64 billion Anglo American takeover bid.

Read more »

Mining workers in high vis vests and hard hats discuss plans for the mining site they are at as heavy equipment moves earth behind them, representing opportunities among ASX 200 shares as nominated by top broker Macquarie
Resources Shares

2 of the best ASX mining stocks to buy now

Analysts have good things to say about these miners.

Read more »

A woman in hammock with headphones on enjoying life which symbolises passive income.
Dividend Investing

Buy 300 shares in this glorious ASX 200 dividend stock and create almost $2,000 in passive income

Atop the juicy passive income, I like this ASX dividend beauty for its potential share price gains.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Resources Shares

Up 51% from their 52-week low, is it too late to buy Mineral Resources shares?

Mineral Resources has been on a tear since mid-January. Do these top brokers think it's too late to buy?

Read more »

Three satisfied miners with their arms crossed looking at the camera proudly
Resources Shares

ASX 200 mining shares charging higher amid China's $210 billion cash injection

The big three ASX 200 miners are charging higher on Friday even as the benchmark sinks.

Read more »

Two excited mining workers in yellow high vis vests and hardhats shake hands to congratulate each other on a mineral discovery
Resources Shares

What this unprecedented short squeeze signals for ASX copper stocks

ASX copper stocks have been benefiting from soaring demand for the red metal amid limited new supplies.

Read more »

Female miner standing next to a haul truck in a large mining operation.
Resources Shares

What's the outlook for ASX iron ore shares after the federal budget?

There may be trouble ahead for the iron ore price according to broker Citi.

Read more »

happy mining worker fortescue share price
Resources Shares

How Fortescue shares could gain from the Federal budget

Fortescue could be among the ASX shares to benefit most from the new Federal budget.

Read more »