Investors in iron ore companies who’ve seen prices tumble from record highs to under US$100/t could be in for more pain in the coming months as the rout intensifies for Australia’s most valuable commodity.

But opportunities could emerge after a six-month window as steel factories end their buyer’s strike and Chinese customers restock on Australia’s prized Pilbara dirt.

Iron ore producers who were in dreamland in May when prices charged to US$233/t on a Chinese steel boom have watched helplessly as they flipped into freefall, give or take a couple of dead cat bounces.

All in all the Benchmark 62% fines price fell by over 55% to US$101.95/t by the end of last week according to Fastmarkets MB.

They dropped further by US$8.97 on Monday to US$92.98/t, with 58% discount fines at US$64.73/t and 65% premium Brazilian product at US$117.60/t.

While prices continue to support big margins for the Pilbara iron ore miners, everything is relative and last week’s 20% decline, which drove prices to 14 month lows, was the worst single week since the Global Financial Crisis.

There were few places to hide yesterday amid tumbling iron ore prices, weak US markets and uncertain Chinese commodity demand as the debt crisis engulfing its second largest property developer Evergrande continues to play out, dealing a psychological blow to other resources stocks as well.

Even companies in hot commodities like uranium, lithium, coal and rare earths were sold off as the ASX 200 Materials sector lost 3.74% to lead the broader market to a 2.1% loss, the bourse’s worst day since February.

But the focus is squarely on what ructions in China will do to the iron ore price and when the kibosh will wear off.


What is the near term outlook for iron ore?

The Dalian Commodities Exchange, the futures market which sounds a warning bell for price shifts in the iron ore spot trade, is shut until Wednesday amid China’s Mid-Autumn Festival.

But there were warning shots from Singapore, where contracts for October delivery shed 8.73% to hit US$92.85/t and futures for January settlement fell a similar amount before recovering to US$95.20.

It could spell trouble for higher cost junior miners who used the window provided by this year’s pandemic and stimulus driven commodity boom to open new operations that are now vulnerable. Venture Minerals (ASX:VMS) announced on Friday that it had both made its first shipment from the Riley iron ore mine in Tassie and put it under review on account of falling prices and rising shipping costs.

GWR Group (ASX:GWR) entered a trading halt yesterday pending a “material update” about its C4 iron ore deposit at its Wiluna project in WA. It enjoyed prices of US$214/t in the June Quarter but also recently reported cash costs of around $120/t Australian.

Todd Warren, head of research for Tribeca Investment Partners, told Stockhead investors hoping for a return to elevated price levels will need to wait until factors that have clamped iron ore prices, like China’s government mandated steel production cuts – rolled into its dream of baby blue skies for February’s Winter Olympics – play out.

“It’s difficult to see catalysts in the immediate term that would be positive for the iron ore price,” he said.

“But if your timeframe is somewhere beyond six months, we would expect to see the market stabilise.

“Because six months out, puts you out beyond, you know, the Beijing Winter Olympics, it puts you beyond the Chinese winter, puts you beyond Chinese New Year, and you’re into a whole new buying season and the prospect that, you know Chinese steel mills returned to some degree of normality.

“And therefore, the demand for iron ore returns to normality as well.”


Mining analyst: expect US$75-100/t over the next six months

Mining analyst Gavin Wendt from Minelife believes iron ore could go as low as US$75/t as China continues to push its steel industry to keep production to 2020 levels, cancelling out a 12% year on year increase seen through the first half of 2021.

“I think we’re looking at prices being relatively weak for the next five months, six months, because you’ve got the Winter Olympics happening February next year,” he said.

“I think we’re going to probably see prices trading sideways between now and then, I think a lot of the steam has come out of the iron ore market.

“So I don’t see a lot of downside from here. Although I think the upside for the next five or six months, is probably going to be US$100, and maybe downside of US$75.”

Set against the backdrop of a trade war with Australia, inflamed further last week by a nuclear submarine deal signed by Australia, the UK and USA, China has been happy to use the circumstances to knock our richest export down to size and cool commodity prices at home. But Wendt suggested it would eventually have to return to the market to keep the structural decline in its construction sector at bay.

“Ultimately, China is going to have to come back into the market, because its construction sector is a major contributing factor to economic growth,” Wendt said.

“And I think the Chinese understand that, and they have parked the steel sector, they parked the construction sector temporarily. And of course, you know what’s going on with issues around their construction sector at the present time, it’s a convenient way for China to take the heat out of iron ore prices.

“So do I think it’s going to be sustainable? No, I think they’re going to come back and start buying again.”

“But it’s probably unlikely that we’re going to see when they start coming back in the market in a big way, in six months’ time, I don’t think we’re going to see the same sort of price level as we saw previously.

“Because we did have that very special confluence of factors on the supply side, coinciding with escalating demand.”


New supply will come online, but will it flood the market?

Some analysts are especially bearish about the long-term prospects for the iron ore price due to projections that supply is set to outweigh demand in the coming years.

UBS last week warned iron ore would drop below US$100/t this year and average around US$89/t in 2022 before landing at a long-term forecast of US$65/t, prompting it to slash its price targets on Rio and BHP and slap a sell recommendation on Fortescue Metals Group (ASX:FMG).

Fortescue has already dropped below the investment bank’s new $15 price target (down from a previous $18) after dropping to $14.70 yesterday, a 40% loss year to date.

The long term forecast is predicated on the idea 160Mt of idle capacity will come online from the major iron ore producers, led by 96Mt from Brazil’s Vale, with another 30Mt potentially arriving from Australian mid-tier Mineral Resources (ASX:MIN).

Warren said there were reasons to be cautious about supply-side promises by the big iron ore miners, especially Vale, which is yet to come close to its 400Mtpa production target since the Brumadinho dam collapse in 2019 forced it to temporarily shut a number of its mines for safety reasons.

“Is it realistic to expect that there will be a supply increase in coming years? Yes. The scale of that is the question,” he said.

“In my 20 plus years of analysing resource companies globally, it’s very rare that Brazil meets its guidance. That’s one thing I’d say. Will they increase their production? Yes. Will they hit their production guidance, I doubt it.”

China is also hoping to diversify away from Australian iron ore by using more scrap steel and accessing high grade ore from the multi-billion dollar Simandou project in Guinea, which is a high-quality deposit plagued by access and logistical issues as well as a temperamental political environment in the West African nation, which recently saw the reintroduction of military rule following a coup d’etat.

“Those tonnes are coming. They are high grade tonnes, it allows China to differentiate their source of iron ore away from Brazil and Australia and they can control the pace of development. So yes, it’s coming,” Warren said.

“They’ve turned soil there on the rail line. The recent coup in Guinea, maybe creates some question marks around timeframes. But yes, you’d expect Guinean tonnes to be in the market within the five to seven-year time frame.

“With regards to other Australian producers, Mineral Resources have an excellent track record of delivering on their promises. Now, the question is if iron ore was at $60 a tonne, are they going to want to be delivering all those tonnes to market? Again, it would depend on the cost profile.”


Are ASX-listed iron ore miners becoming a buying opportunity?

Nevertheless Warren now sees iron ore miners as more of a buying opportunity than they were when soaring and unsustainable prices inflated their share prices to record levels.

He said Tribeca, which has around $2.4 billion of funds under management, had relatively little exposure to iron ore when prices peaked in May.

“It’s been quite the rout hasn’t it, essentially a halving or more from previous highs,” he said.

“So, it’s certainly happened at some pace. I think I’d say at the outset that we couldn’t quite justify, by fundamentals, the run up to in excess of US$200, so whilst the pace of this collapse I think took everyone by surprise nor were we all that comfortable with the price over US$200 because it didn’t seem to be justified.

“So we figured there was probably something coming at some point, it was just a question of when, and really … you’ve seen that the iron ore price now is sort of back to where we were 12 months or so ago.”

He said Tribeca were increasingly interested in the prospect of generating returns as the price declines, as long as your investment timeframe is beyond three to six months.

“Question is from here, are we interested? Yes, increasingly,” Warren said.

“So I’d also throw into the mix the other big Australian producer, albeit with offshore assets, is Champion Iron (ASX:CIA) with their Canadian assets.

“And if you look at them as an example, they are much smaller than the other three but will be doubling production within the next 12 or 18 months (from 7.5Mtpa to 15Mtpa).

“Even at US$100/t iron ore they’re probably on a 3.5 times enterprise multiple, which seems pretty cheap to me.”

Wendt said UBS’ sell recommendation on FMG may be late to the party.

“I don’t know why you necessarily put a sell on the market now. You would probably put a sell on if the iron ore price has fallen faster than you may have expected,” he said.

“But once the damage is already done, I don’t see much point putting a sell on a stock.

“I mean, investors would have liked that sell recommendation three months ago, you know, but I think the difficulty with things like iron ore is we don’t have a crystal ball.”


Frothy values lead to profit taking: Wendt

While iron ore was the headline yesterday, the ASX 300 resources index’s biggest losers came in other commodities, many of them China-facing like rare earths major Lynas (ASX:LYC), copper producer OZ Minerals (ASX:OZL) and lithium miners Pilbara Minerals (ASX:PLS) and Orocobre (ASX:ORE).

Investors also sold out of uranium stocks, inspired by a recent resurgence in the spot price of the nuclear fuel, and coal stocks, which remain exposed to rapidly overheating prices driven by supply shortages in China.

Wendt said negativity around the Chinese economy and iron ore – effectively the barometer of the Australian share market – certainly had an impact.

But he also said overheated equity markets were a factor and stocks in some commodity classes, particularly uranium, had become “frothy”.

“If you have a look at what’s happened in the lithium space with lithium companies, and the lithium price, there’s certainly a lot of speculative money in the market at the present time,” he said.

“And some of these underlying commodity prices, and probably the movement of equity prices, haven’t been justified.

“The spot uranium price has moved up. For example, we’ve seen equities moving up like 800% over the last 12 months, and even the last few months going almost straight up exponentially.

“It’s just been crazy. None of those companies are producers, they may be explorers, and they may have a deposit, but unrealistic share price movements.”

Wendt said the fundamentals were there long term for uranium, noting prices had to rise, but views much of the current spot price increase – led by buying on the spot market by the Sprott Physical Uranium Trust – as speculative.

“Whilst the money has been coming out of iron ore it’s been going into lithium and it’s been going into uranium and you know, it becomes a bit of a self-fulfilling prophecy.

“The more money that goes in to equities in the sector, it just keeps pushing prices up, but I think things have gotten out of out of balance to a large degree.”