Bulk Buys: As China wilts on economic crackdown, are big iron ore miners now in buying territory?

Iron ore has emerged from the doghouse as Chinese financial authorities blinked in the face of an economic slowdown.

Having taken steps to moderate growth due to power rationing, pollution concerns, inflationary pressures and an overheated and debt-riddled property market, the People’s Bank of China appears to have finally relented in its latest quarterly report.

It scrubbed bearish phrases from its wording, moves which could bring more liquidity for its property market and ease steel demand fears.

That is good news for people who believe the remarkable steel production cuts mandated by the Chinese Government this year to curb pollution ahead of next year’s Beijing Winter Olympics are only temporary.

Expectations of rising steel demand gave way to bullish speculation in the iron ore futures market.

The most traded Dalian futures contract for January hit the 10% upper limit before sliding to a still significant 8.17% gain by 6pm AEDT while Singapore’s contract for the same month rose 6.17% to US$99.70/t.

ANZ Research senior economist Felicity Emmett said the rally was prompted by the change in China’s easing around lending for property.

“Iron ore futures rallied after China’s central bank announced a possible easing of measures to aid the country’s recovery,” she said.

“China’s financial regulators told some banks to issue more loans for property projects, with the aim of easing liquidity strains without sparking another speculative bubble.

“These measures eased concerns of weaker demand for steel and iron ore.”

Benchmark 62% iron ore fines soared almost US$4/t to US$95.63/t on Monday night according to Fastmarkets MB, with 65% fines attracting a premium of $109.20/t and discount 58% fines buying US$68.18/t.

Are big iron ore miners now in buying territory?

The turnaround in market sentiment has been sharp, coming just days after iron ore prices hit 18-month lows of around US$87/t on the back of fragile steel production figures out of China.

It prompted Morningstar for one to knock down its fair value estimates on the major iron ore miners and royalty company Deterra (ASX:DRR), putting targets of $39 on BHP (ASX:BHP), $89 on Rio Tinto (ASX:RIO) and just $10 on Fortescue (ASX:FMG).

Adam Dawes, senior investment advisor at Sydney stockbrokers Shaw and Partners, is of a different view.

Shaw and Partners’ analysts, led by well known stock researcher Peter “Rocky” O’Connor, have quickly turned supportive of iron ore stocks.

“We had our analyst (meeting) this morning (and the) first line Rocky – Peter O’Connor – basically said was ‘buy iron ore and sell the gold stocks’. He thinks gold’s going to potentially stay subdued for a little bit longer and the iron ore miners are going to start to rally,” Dawes told Stockhead yesterday.

“Obviously, China came out with obviously keeping their monetary policy sort of little little changed, but they did start to change some of their wording in their monetary policy, which I think signals a shift towards an easier policy.

“Still maintaining a sort of tough stance on the property market, but there’s lots of other things that they can do to stimulate the economy.

“Which certainly means that BHP, Rio and Fortescue as well as Champion Iron, which did quite well today also, means that they will look to take further gains going forward.”

BHP was up 4.02% on a day which coincided with the first trading session after it and Woodside (ASX:WPL) approved the US$12 billion Scarborough LNG development in WA. Rio gained 3.61% and Canadian high grade producer Champion Iron (ASX:CIA) was up a ripping 8.04%.

Mineral Resources (ASX:MIN) rose 4.93%, while Mount Gibson Iron (ASX:MGX) climbed 5.2% and Tasmania’s Grange Resources (ASX:GRR) was up 5.46%.

The biggest winner was Fortescue, closing at $17.35 after gaining 9.81%, although among the big boys Shaw and Partners only has a buy rating on BHP.

“If you took a 10-year chart of BHP, which we did this morning … there’s some massive support lines for BHP,” Dawes said.

“$36 is massive support there for the stock. It’s hit that a couple of times in the last couple of weeks, and then bounced really, really quickly.

“And that sort of gave us some comfort to be in the stock or start to get involved with stock again, because of that support line of $36.”

Dawes said he likes the diversified BHP because it has a number of positive catalysts coming in the new year, including its oil and gas demerger into Woodside, its company unification and focus on new commodities like potash.

Short term support for iron ore price before longer term questions

While many analysts and forecasters are pessimistic on iron ore prices and have projections of under US$80/t in 2022 (the Federal Treasury sees them falling to US$55/t by the end of FY22), Dawes believes iron ore prices have found a short term low and are likely to rise above US$100/t in 2022.

That could make iron ore a short term trading opportunity.

“I do think that it will stay around or over that US$100 mark, especially if China starts to stimulate a little bit more, (it) will certainly start to move towards that, and that certainly helps our iron ore guys going forward,” he said.

“This is going to be a trade event, I think.

“You know, we’re still going to see some movement or volatility in the iron ore price. So don’t get too wedded to it. But it certainly looks like you’re on the right side of the trade now.”

Longer term, Dawes said Australian iron ore could face headwinds from the development of the China-backed Simandou mine in Guinea but that the big Australian producers remain “in the box seat” at current prices due to their low cost base.

Chinese economic policy has seesawed this year, moving from post-pandemic stimulus to cool down mode as risks have emerged in the heavily indebted property sector, highlighted by the struggles of real estate developer Evergrande.

China also appears to be succeeding in plans to limit steel production to 2020 levels, having raced well ahead of them earlier in the year.

A loosening of monetary policy however could support underlying steel demand that may drive bids for iron ore should restrictions on steel makers be lifted.

Speaking to Stockhead last week about the recent downturn in Chinese steel output, iron ore market expert and Magnetite Mines (ASX:MGT) technical director Mark Eames said it seemed unlikely China would dramatically shift from its long term focus on economic growth.

Junior rise on positive news, prices

At the junior end of the iron ore sector share prices were on the move yesterday as well.

$14 million capped Akora Resources (ASX:AKO) was up more than 15%.

It has made some high grade hits at its Bekisopa project in Madagascar, where it plans to deliver a JORC Resource in the March Quarter.

Fe Limited (ASX:FEL), which recently began exporting from the JWD mine in WA under an offtake deal with Glencore, was up 10%. GWR (ASX:GWR) was up 14.29%.

Legacy Iron Ore (ASX:LCY) continued its climb since selling a stake in its Mt Bevan JV with Hawthorn Resources (ASX:HAW) to Gina Rinehart’s Hancock Prospecting.

Rinehart revealed the value the 2020-21 bull run for iron ore generated for Hancock’s Atlas Iron business, just days after revealing a $4.4 billion profit and $5.6 billion dividend splurge from her 70% owned Roy Hill iron ore mine.

Atlas shipped 9.7Mt of iron ore from Mt Webber and the newly commissioned Sanjiv Ridge iron ore mine, up from 9.1Mt in FY20, increasing its NPAT by 146% from $381 million in FY20 to $938m in FY21.

After seeing royalty payments to the State Government increase 35% to $93 million on the back of Atlas’ 2021 success, Rinehart used the results release yesterday as another soapbox to take aim at unspecified government red tape.

“We just have to remember that Australia exports its ore internationally, so we have to be cost competitive internationally, hence we should be wary of onerous government cost burdens, that don’t encourage investment,” she said.

“It’s time we put greater priority on reducing government tape, and our government in turn, put greater priority on that welcoming investment and enabling living standards to grow, instead of growing government tape.”

In the same release Atlas said its Sanjiv Ridge mine was completed “safely, on budget and ahead of schedule with first haulage completed one month ahead of plan”.

It has received all its regulatory approvals for the development of the new Miralga project, where an Aboriginal business has been awarded the site establishment works and mining services contract and first haulage is scheduled for the June quarter of 2022.

The company has studies in the works on its McPhee and Ridley projects.

COP26 is in the books but coal miners remains bullish on demand

Is coal on its way to being phased out?

Not if you ask Australian coal miners, who are retaining bullish demand outlooks for their product based on currently announced transition policies, particularly in the developing world in Asia.

New Hope Corporation (ASX:NHC) CEO Reinhold Schmidt (and, serendipitously, Resources Minister Keith Pitt) told shareholders at the company’s AGM last week cities in Asia would remain reliant on Australian coal for the next two decades.

“As the Chairman noted, the Company recognises and supports the need to transition to a global lower carbon economy; however, many communities, particularly the large cities of Asia, will require coal for affordable and accessible baseload energy provided by our customers to power homes and industries in the next two decades and beyond,” he said.

“As you can see in the graph the base case seaborne demand exceeds probable and highly probable production from the early 2030’s onwards. This demand curve is based on the current transition measures in place by governments across the world.”

Elsewhere, news among the big coal players has been characterised by safety issues, after the death of a worker over the weekend at Coronado’s (ASX:CRN) Curragh mine.

It’s the second death in less than two years at the operations, which have been temporarily suspended while an investigation take place.

Meanwhile, Whitehaven Coal (ASX:WHC) received a prevention notice from the NSW EPA in relation to blasting at its Maules Creek mine, which has seen an increase in fume events since changing its explosives supplier on October 1.

The company said it will cooperate with the EPA and that production guidance from the mine for FY22 remains unchanged.

At Stockhead, we tell it like it is. While Magnetite Mines and Fe Limited are Stockhead advertisers, they did not sponsor this article.