ASX 200 iron ore stocks have skyrocketed since China announced a raft of stimulus measures to boost its economy on 24 September.
On the day of the news, we saw an immediate rotation out of ASX 200 bank shares, which have run strongly over the past year, into beaten-down mining stocks.
The market has been underweight on ASX 200 iron ore stocks recently due to concerns about China, as well as iron ore commodity prices falling to two-year lows in the September quarter.
That all changed on 24 September.
Since then, we've seen a sugar hit to mining share prices.
BHP Group Ltd (ASX: BHP) shares have jumped 13.56% higher to $45.22 today.
ASX 200 iron ore pure-play stocks, Fortescue Ltd (ASX: FMG) and Champion Iron Ltd (ASX: CIA) have risen 14.3% to $20.16 per share and 21.18% to $6.98 per share, respectively.
The Rio Tinto Ltd (ASX: RIO) share price is up 12.01% since 24 September to $125.85 today. Mineral Resources Ltd (ASX: MIN) shares have also lifted 39.93% to trade at $51.51 today.
In an article, Tom Hays, research analyst at Tyndall AM, said news of the China stimulus provided traders with an immediate opportunity for short-term gains. But he's more interested in the long-term view.
Is this recent rally in mining stocks sustainable?
Can the rally on ASX 200 iron ore stocks last?
To answer this question, Hays firstly examines the outlook for the iron ore price based on supply and demand.
Hays said market concerns about a potential oversupply amid subdued Chinese demand seemed "overplayed by the bears in the market."
He also points out that historically, iron ore prices have been stronger in December through February because China's domestic production falls during the winter months.
This forces China to rely more on seaborne supply, which is often disrupted by wet weather in Brazil and the Pilbara here.
Hays commented that US$95 per tonne was the likely support level for the iron ore price today.
He said:
Prices have dipped below US$95/t for only 16 days this year, compared to 50 days over the last three years. The cost curve supports this level, as many producers would be unprofitable at lower prices.
Additionally, trader mentality tends to kick in once prices break the US$100/t threshold, adding further support to this range.
The ABC recently reported that BHP and Rio Tinto have break-even prices of about $US45 per tonne.
Fortescue's break-even is about $US64 per tonne, and Mineral Resources' break-even is above $US80 per tonne.
Iron ore price catapults 16% overnight
The 62% Fe iron ore price jumped 15.89% overnight to US$108.74 per tonne, the highest it has been since mid-July.
Trading Economics said trading volumes would likely remain thin this week because Chinese markets are closed for the Golden Week holiday.
China is the biggest consumer of iron ore, importing 76% of the world's exports.
Australia is the world's biggest producer of iron ore, exporting 56% of the global supply in 2023.
Our iron ore export earnings to China alone were worth $115.6 billion in 2023, according to the Department of Resources.
To put that into perspective, our second-biggest buyer, Japan, was worth $8 billion in export earnings.
Which ASX 200 iron ore stock is this broker buying?
Tyndall recently bought Fortescue shares, with Hays explaining:
It offers an attractive entry point, and its lack of gearing makes it a pure play on a rebound in iron ore prices while paying an attractive fully franked distribution.
BHP and Rio Tinto offer more diversified exposure, with their base metals businesses providing some downside protection.
