Iron Ore – time to review material companies.

Demand for iron ore is stagnating. China represents 71% of the global seaborne iron ore market. China’s housing sector has slowed down and the economy showing clear signs of maturity and saturation. With the slow down on building property in China we expect that demand for iron ore will reduce in coming years.

Yet despite this iron ore supply is set to surge from 2025, with Africa’s Pilbara (the Simandou region) commencing production. Which, unless mitigated by supply cuts elsewhere, will push the market 5-10% into surplus. As with nickel, China has an incentive to over-invest in the commodity, flood the market, and drive down prices for one of their largest imports.

Logic would suggest this could result in a US $50 per ton, dropping the iron price to US $80 per ton in line with the cost curve. This would slash earnings at BHP, RIO and FMG by 49%, 49%, and 65% and reduce earnings of the ASX 200 by 10%. Rather than waiting for history to repeat, investors would be wise to look through the current temporary earnings strength in iron ore stocks and reposition to avoid what could potentially be carnage.

Our current view on: BHP, RIO and FMG

BHP’s fair value as $48.00/ share. At the last closing price of $43.36, BHP is trading at a 9.7% discount to our valuation. Accordingly, BHP is regarded as ‘Undervalued’ at current levels.

RIO’s fair value as $119.89/ share. At the last closing price of $132.46, RIO is trading at a 10.5% premium to our valuation. Accordingly, RIO is regarded as ‘Overvalued’ at current levels.

 FMG’s fair value as $15.48/ share. At the last closing price of $29.70, FMG is trading at a 91.9% premium to our valuation. Accordingly, FMG is regarded as ‘Overvalued’ at current levels.

BHP and RIO are trading at their fair value at present, if you are overweight these companies, it might be a good time to speak to your adviser about reducing the risk to these companies. Fortescue is trading above fair value, now might be a good time to review your holdings.

If you have any questions, please contact our office.

Grow Your Wealth Pty Ltd AFSL 403509

Phone: (07) 4771 4577Email:   admin@gyw.com.au

Articles | Newsletter

February 28, 2024

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