Iron ore remains resilient, could benefit from China economic rebound; and gold is 'your friend' says UBS

Gold has traditionally been seen as a safe haven in troubled times, but iron ore seems to be holding its ground too.

From an Australian perspective, iron ore is the commodity that should be most affected during periods of global uncertainty that involve China. This is because Australia’s exports predominantly go to the Asian powerhouse.

However iron ore prices have mostly held firm, only falling by 3 per cent this year.

UBS commodity analyst Dan Morgan puts it down to investors expecting a rebound of China’s economy and that iron ore will play a role in that.

“People are confused about why [it hasn’t fallen],” he said on an analyst call today.

“Obviously there’s a speculation of stimulus. You are going to see commodity intensive growth including construction.

“There’s going to be steel needed in Q2-Q3, but getting scrap around the country is difficult and we’ve had other supply shocks.

“The market is actually tight and so whilst now markets are haemorrhaging and there’s a lot of red on the screen, iron ore prices are expected to do well particularly when the stimulus measures in Q2 and Q3 come through and the commodity intensity of growth in China will lift.”

Earlier this week, UBS flipped its rating on Australia’s most major iron ore company Fortescue Metals (ASX:FMG) from sell to buy. It also upped its price target from $9.30 to $10.20.

UBS conceded a prolonged outage in China would see iron ore demand drop, but said it was business as usual (for now) and it would benefit from a rebound.

“Channel checks indicate iron ore shipments are continuing as per normal, with port inventory drawn down last week as rail remains in operation and truck drivers return to work post lifting of restrictions,” UBS said.

“[Electric arc furnace] utilisation is down to ~20 per cent, with scrap availability reduced and production margins squeezed. As activity resumes, we would expect steel production to lift – and with it, iron ore demand. A similar level of steel production to 2019 should see iron ore remain tight in 2020.”

Gold is ‘your friend’ in times of crisis

But UBS did not neglect gold, noting it was a commodity people were looking at particularly hard.

Morgan tipped gold stocks to hold firm for the foreseeable future, with the record high gold price a big driver of that.

“You have seen the equities jump around a bit, but you’ve got very strong gold price, very strong margins and most of the major gold stocks we look at are in good positions in terms of earnings, cash flow and balance sheet,” he declared.

“If you are fearful, the gold stocks are there and your friend.”