Fortescue Metals Group (ASX:FMG) shares have staged a stunning rally this morning to pull the materials sector to glory, even as spot iron ore prices tipped below US$90/t for the first time in over a year last night.

FMG, which has spent the past several days in a ball of confusion about exactly how serious Andrew Forrest’s multi-billion dollar green energy policies are, was up an astonishing 8.26% this morning.

That took it shares up by more than $1, rising back over $15 to $15.40 on no news.

Dalian iron ore futures for January delivery have staged a bounce this morning after collapsing yesterday. Prices for spot 62% iron ore fines were down US$3.40/t to US$88.90/t according to Fastmarkets MB yesterday.

Most iron ore miners were up, however, with BHP (ASX:BHP), Rio (ASX:RIO), Champion Iron (ASX:CIA) and MinRes (ASX:MIN) all higher, leading the materials index to a 1.4% gain as the rest of the ASX 200 faltered.

 

Iron ore majors share prices today:


 

 

Property demand weighs on iron ore: CBA

Commbank analyst Vivek Dhar said he sees downside risk to the iron ore price below the Commonwealth Bank’s US$100/t 2021 price forecast due to weak sentiment in the Chinese property market and lower infrastructure investment by the Chinese Government.

Steel mill margins have also been crimped in recent weeks. While plans to reduce steel production on environmental grounds were largely responsible for iron ore prices sliding 60% from record levels of US$237/t seen in mid-May, they had also supported high final steel prices.

Lower mill margins could be an indicator of weaker demand for steel in general amid a credit starved Chinese property market.

“Weak steel demand and low steel mill margins are likely to keep iron ore prices under pressure in coming weeks,” Dhar wrote in a note this morning.

“We now see downside risks to our outlook of $US100/t (62% Fe, CFR China) in Q4 2021. Importantly, the dynamics governing lower iron ore prices have changed. Previously, steel output cuts in China to reduce emissions (and air pollution more recently) drove iron ore prices lower.

“That meant that steel prices and steel margins were well supported.”

One possible outcome of falling steel margins could be more support in the short term for low grade iron ores like Fortescue’s which have been suffering big discounts amid pollution restrictions on steelmakers.

“The substantial fall in steel mill margins in recent weeks has important implications for the type of iron ore used by steelmakers, especially with signs that coking coal prices in China are correcting lower (down 8% since November 5). Low‑grade (~58% Fe) iron ore could see increased demand relative to other grades as mills look to protect margins,” Dhar said.

“While that’s not the most environmentally‑friendly outcome, given the higher emissions per unit of steel produced, the economics are more appealing – particularly with the steep discounts for low grade ore at the moment (31% lower than the 62% Fe benchmark).”