Full throttle: China is back to work and iron ore will be in demand

China is cranking up the factories again and a number of market commentators are tipping the Asian behemoth will soon start rolling out more significant stimulus measures to ignite its economy.

Beijing’s direction of $US500bn ($845bn) towards capital investment in response to the 2008 financial crisis provides a strong hint of what’s to come.

As has happened in the past, China’s stimulus injections have led to a massive ramp up in infrastructure projects.

This is good news for a number of commodities, starting with iron ore.

While China’s Manufacturing Purchasing Managers index fell to a record low in February, the survey indicated that over 90 per cent of all manufacturers would be back at work by the end of the month.

One sign of evidence that steel in particular is about to ramp up is that domestic stocks of steel fell 4.8 per cent in the last week, according to intelligence service MySteel. This hasn’t happened since the virus first broke out.

China’s iron ore stockpiles are also at a seven-month low of 123.75 million tonnes.

Earlier this month, UBS analyst Dan Morgan predicted a takeoff in commodity intensive growth could occur as soon as next quarter.

Holding firm in a crisis

The steel market, and in turn iron ore, has actually weathered the pandemic quite well – better than many other industries.

According to the World Steel Association, global steel output in February 2020 actually increased slightly year-over-year — to 143.3 million tonnes. China actually remained above average.

Prices have held fairly steady, with the benchmark S&P Global Platts 62 per cent iron ore price only dipping 1 per cent.

Fortescue (ASX:FMG) CEO Elizabeth Gaines told Stockhead she had not seen a decline in shipments but expected long-term demand to hold.

“COVID-19 has brought uncertainty and volatility to global markets, including the iron ore market. Fortescue’s shipments, however, continue from Port Hedland and mining and processing activity remains in line with our guidance for FY20,” she said.

“We remain confident in China’s ongoing commitment to urbanisation and development, and believe this will continue to underpin long-term iron ore demand.”

While Fortescue shares took a dive throughout February, they have gained 11 per cent in the last week.

Small caps on the radar

There aren’t many ways for investors to gain exposure to juniors in the iron ore space. This gives the handful of small caps already making headway in the industry a big advantage.

Investment banks are bullish on a number of the iron ore miners, because of the expected strong demand for steel after China presses the stimulus button.

Two that are on the radar are Mt Gibson Iron (ASX:MGX) and Champion Iron (ASX:CIA), which have projects in Western Australia and Canada respectively.

“Mt Gibson Iron and Champion Iron offer unique exposure to the high-grade iron ore market,” according to Macquarie, which has buy tips on both.

Mt Gibson, now at 73c, is expected to rise to $1.10 over the next 12-months and Champion, last trading at $1.44, is expected to reach $3.20.

BCI Minerals (ASX:BCI), meanwhile, has a royalty in the Iron Valley mine in the Pilbara that is operated by Mineral Resources (ASX:MIN).

That royalty delivered the company earnings before interest, taxes, depreciation, and amortisation of $3.2m in the December 2019 quarter.

Meanwhile, Fenix Resources (ASX:FEX) is on the cusp of building a 1.25-million-tonne-per-annum iron ore project.

Fenix says the Iron Ridge project will cost about $11.9m to build – almost half of which will be deferred until the first shipment is made – for average annual earnings before tax of $16.4m.

Other juniors with exposure to iron ore include Magnetite Mines (ASX:MGT), which is advancing its nearly 4-billion-tonne high-grade Razorback mine in South Australia towards production, Strike Resources (ASX:SRK), which is moving closer to potential early cash flow at its Paulsens East project in the Pilbara, and Legacy Iron Ore (ASX:LCY).