Iron ore prices have bounced back above $200 per ton on reports that North China’s steel hub Tangshan is contemplating easing restrictions on steel output at its mills. Earlier, on May 26, 2021 iron ore prices had plunged to 1-month low of $183 per ton due to China’s campaign to limit steel output to reduce carbon emissions. Thus, the prospect of relaxing restrictions has worked in favor of iron ore, propelling prices to the current level of $207.50 per ton.
Iron ore has clocked a year-to-date gain of 30.9%. Iron ore prices had logged a solid 80% gain last year — making it the best-performing major commodity in 2020. Last year, China’s massive infrastructure stimulus to recover from the pandemic-induced slump led to increased demand for iron ore fueling its prices amid supply concerns from coronavirus impacted Brazil. However this year, iron ore prices somewhat lost steam as China’s government ordered local steel mills, which had failed to meet emission control targets, to slash output between Mar 20 and Dec 31. China remains committed to its pledge to hit peak carbon emissions by 2030 and reach carbon neutrality by 2060.
Despite the abovementioned restrictions, demand for iron ore showed resilience in China as mills that were not subject to output curbs continued to ramp up production. Steel production in China is benefiting from rise in infrastructure spending and renewed vigor in manufacturing activity. The Caixin China General Manufacturing PMI was at a five-month high of 52.0 in May 2021. This also marks the 13th consecutive month of expansion in factory activity. Per the latest data from the World Steel Association, steel production in China went up 15.8% year over year to 374.6 Mt (million tons) between January and April 2021. Meanwhile, global steel production was up 13.7% year over year to 662.8 Mt. Also, in the first four months of 2021, China imported 381.98 million tons of iron ore, which reflected a 6.7% increase year over year.
Meanwhile, top iron ore producers like
Rio Tinto plc
RIO
,
BHP Group
BHP
,
Vale S.A
VALE
and
Fortescue Metals Group Limited
FSUGY
struggled to keep up with strong demand from China in the first quarter due to operational challenges and weather disruptions. BHP Group’s iron ore production in the January-March period was down 3%, while VALE’s production declined 19.5%. Rio Tinto’s iron ore output in the March quarter fell 2% on an annual basis. Fortescue Metals Group’s iron ore shipments of 42.3 Mt were in line with record shipments last year. However, production is expected to pick up through the year.
The World Steel Association forecasts steel demand to grow 5.8% in 2021 and reach 1,874.0 million. China’s steel demand is expected to grow 3.0% this year. Per the International Monetary Fund, the global economy is projected to grow 6% and 4.4% in 2021 and 2022, respectively. China is expected to grow 8.4% this year and 5.6% in 2022. This will boost steel demand, thus raising the requirement of more iron ore. This will continue to support iron ore prices.
Industry Outperforms S&P 500 & Broader Sector
The Zacks
Mining – Iron
industry has gained 28.4% so far this year, outperforming the S&P 500 and the
Basic Materials
sector’s rally of 12.6% and 24.4%, respectively.
Image Source: Zacks Investment Research
3 Mining Stocks in Focus
We recommend these iron mining stocks that are well poised to ride on the rally in iron ore prices. These stocks have a Zacks Rank #2 (Buy) or #3 (Hold) and a
VGM Score
of A or B. Our research shows that stocks with such a combination offer the best investment opportunities.
Year to date, these stocks have outperformed the S&P 500’s growth of 12.6%. This is shown in the chart below.
Image Source: Zacks Investment Research
Vale
: Rio de Janeiro, Brazil-based Vale produces and sells iron ore and iron ore pellets for use as raw materials in steelmaking in Brazil and internationally.
Backed by the start-up of new iron ore assets, the company expects to achieve 350 Mt capacity by 2021-end and 400 Mt per year by the end of 2022. The company remains committed to introducing more high-quality ore in the market. Vale’s efforts to improve productivity and cut costs will aid margins. Further, investment in growth projects and efforts to lower debt will benefit it.
The company has a long-term estimated earnings growth rate of 32.4%. The Zacks Consensus Estimate for fiscal 2021 earnings suggests year-over-year growth of around 138%. The consensus estimate has moved north by 14% over the past 30 days. The company delivered a trailing four quarter earnings surprise of 4.1%, on average. So far this year, the stock has gained 32.5%. It currently has a Zacks Rank #2 and a VGM Score of B. You can see
the complete list of today’s Zacks #1 Rank stocks here
.
BHP Group
: Headquartered in Melbourne, Australia, BHP Group engages in exploration, development, and production of oil and gas properties; and mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal.
BHP anticipates producing between 245 Mt and 255 Mt of iron ore in fiscal 2021. Efforts to make operations more efficient through smarter technology adoption across the entire value chain will aid in reducing costs, thereby bolstering the company’s margins. Its focus on lowering debt is also commendable. The company has four major projects under development in petroleum, iron ore and potash, which will drive growth in the long run.
The company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for fiscal 2021 earnings suggests year-over-year growth of 83.5%. The consensus estimate has moved up 2% over the past 30 days. It has a Zacks Rank #3 and VGM Score of B. The stock has appreciated 17% year to date.
Rio Tinto
: Headquartered in London, the U.K., Rio Tinto engages in mining of aluminum, silver, molybdenum, copper, diamonds, gold, borates, titanium dioxide, salt, iron ore, and uranium.
Rio Tinto expects to produce 325 to 340 Mt of iron ore in fiscal 2021. The company boasts a world-class portfolio of high-quality assets and continues to strengthen it by increasing investment in high-value projects to ensure long-term growth. It also remains committed to making its operations as efficient as possible through the use of technology and innovation, including automation. A strong balance sheet and a disciplined capital allocation support its ability to sustain production, increase investment in development projects (in high-return iron ore and copper), while delivering superior returns to shareholders.
The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year improvement of around 95%. The consensus estimate has been revised upward 11% over the past 30 days. The Zacks Ranked #3 stock with a VGM Score of A has gained 20.8% so far this year.
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