The ASX iron ore share industry has suffered recently for a number of reasons. But the lower share prices drop, the more I believe that now is a good time to look at the major iron ore miners.
The iron ore price has declined from above US$140 per tonne at the start of the year to approximately US$100 per tonne now. As noted by Trading Economics, the iron ore market is facing "weak fundamentals," with the Chinese construction sector showing "little signs of improving".
Meanwhile, iron ore supply grows from ASX miners such as Fortescue Ltd (ASX: FMG), BHP Group Ltd (ASX: BHP), and Rio Tinto Ltd (ASX: RIO).
Yesterday, the Australian Financial Review reported on comments from Baowu, the Chinese government-owned and world's largest steelmaker. Baowu warned of a "long and harsh winter" for the steel industry. Here's what Baowu chair Hu Wangming had to say:
In the process of crossing the long and harsh winter, cash is more important than profit. Financial departments at all levels should pay more attention to the security of the company's funding.
Having said all of that, I think now is the right time to examine the ASX iron ore shares.
Contrarian opportunity?
I've said many, many times over the years that iron ore miners can be very cyclical. Supply and demand is an essential part of the picture.
Chinese demand isn't strong, and global supply is increasing.
However, this isn't the first time that the iron ore price has dropped to US$100 per tonne. We've seen that occur in October 2022 and November 2021. It also briefly touched that level in April 2024.
Current conditions are weak for ASX iron ore shares, with no foreseeable catalyst to help the iron ore price recover. With no clear positives, it's understandable why the BHP share price has dropped 22% over the past year and the Rio Tinto share price is down 19%.
Share price declines — and appealing valuations — don't occur for no reason. The market needs to be genuinely worried about the situation. Look at the BHP share price chart below. Large declines are infrequent, but they do happen. Recoveries have occurred, too, though that's not guaranteed to happen again over any particular timeframe.
The Evergrande concerns of late 2021 caused significant pessimism for the iron ore price and the miners.
I'm not expecting the iron ore price to get back to US$140 per tonne any time soon. But, there are a couple of key reasons why I think now could be the right time to invest in BHP shares and Rio Tinto shares, even if Chinese demand doesn't recover significantly in the next 12 months.
First, BHP and Rio Tinto are investing significantly in copper. Not only does copper appear to have a positive future due to electrification, but it enables the miners to diversify their commodity earnings, reducing the reliance on Chinese iron ore demand.
Fortescue doesn't have that copper exposure, and it recently announced it would essentially be slowing its green energy efforts, so I'm a little less optimistic.
Second, markets are expecting interest rate cuts in the United States, Australia, and elsewhere over the next 12 months. This could significantly influence steel demand by increasing total economic demand.
My preferred ASX iron ore share pick
I'd choose Rio Tinto (over Fortescue) because of its copper exposure. I'd pick Rio Tinto shares over BHP shares because it's part of the huge Simandou iron ore project in Africa.
This could give Rio Tinto geographic diversification and unlock good earnings regardless of the iron ore price.
