Iron ore bucks coronavirus drag, set to remain strong for the rest of 2020

19th March 2020
Resources Rising Stars

The $85bn in annual iron ore exports from the vast and rusty red stretches of the Pilbara is giving Australia an advantage in dealing with the global economic fallout from the spread of the coronavirus (reports Barry FitzGerald on Stockhead).

Among the key mineral exports, it is only iron ore that has avoided demand and price destruction – to date at any rate. Taxes and royalties continue to roll into government coffers, and company profits from the commodity remain at elevated levels.

Iron ore continues to trade around $US90/t ($146/t). That is the same as last year’s annual (calendar) average which itself was up by 36 per cent on the 2018 average of $US66/t — a response to the supply hit from the tailings dam disaster in Brazil early in 2019.

Compare that price performance with other mineral commodities. Copper is now down by 8.5 per cent on its 2019 average, zinc is down by 24 per cent, lead is down by 11 per cent and nickel is down by 9 per cent.

It’s as if iron ore has assumed the sort of “safe haven’’ status attributed to gold, a $25bn export industry.

In the last two weeks, iron ore has actually strengthened its haven credentials over gold by staying steady in price while the yellow metal has fallen by 9 per cent under the weight of forced selling to cover margin calls in crashing equity markets.

Gold at Friday’s close of $US1,530/oz nevertheless remains well ahead of its 2019 average of $US1,393/oz. And it remains deeply embedded in the psyche of investors as a store of value. Iron ore can’t claim that.

Still, in the here and now, iron ore has been a star performer. China’s return to work — and economic stimulus by Beijing — is critical to that remaining the case as its steelmakers can only stockpile unsold steel products for so long.

Currently, analysts reckon things will continue to go iron ore’s way for at least the rest of the year. But try and tell that to the share market where the values of the iron ore producers have been smashed just as hard as most, but not all, other sectors.

All that has created an opportunity for investors, one that recognises the growing disconnect between iron ore’s continuing price strength and the smashing of equity values.

Now it is has to be emphasised here that iron ore’s unique price strength has not shielded the share prices of the iron ore producers from the broader crash in equity markets.

But it has set them up for the quickest recovery in recognition of the fact that unlike large swathes of industry, their profits/dividends are pretty much intact moving forward.

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