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.

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.

It is a situation that Andrew “Twiggy” Forrest recognised when he started increasing his stake in Fortescue (ASX:FMG) recently.

Forrest spent $278m increasing his stake from 35.22 per cent to 36.25 per cent as the Pilbara producer’s share price crashed from its $12.87 peak in January to $8.70 last Thursday.

He got his reward on Friday when Fortescue shares shot back up 13 per cent to $9.93. BHP (ASX:BHP) and Rio Tinto (ASX:RIO) also recovered on Friday, but they had lesser gains of 1.48 per cent and 4.76 per cent, respectively, because of their respective oil and aluminium exposures.

But they did soar 10.8 per cent and 12.9 per cent respectively in the US market over the weekend, again on the basis that as iron ore accounts for 60 per cent and 80 per cent of their earnings respectively, the sell-off in their shares had been overdone.

None of us has the financial wherewithal of Twiggy. The $278m he spent topping up his Fortescue shareholding was less than half of his $820m interim dividend cheque from the company he founded, and assuming the iron ore price holds, he will be picking up a similar sized final dividend payment.

Leverage to iron ore’s price strength thematic is limited in the ASX space outside the big three of Rio, BHP and Fortescue.

It was notable though that Mount Gibson (ASX:MGX) popped 4.8 per cent higher on Friday to 65.5c. It was a $1 stock back on January 22 when equity markets fell off the cliff while iron ore prices held steady. Would-be developer Fenix Resources (ASX:FEX) was 3.7c on Friday. It was 5.7c on January 22.

 

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