A spectacular start to 2019 has seen the XJO rally more than 10 percent from the first trading day of the year, to the high last week. There have been many reasons for the rally, a resolution to the Royal Commission has seen the banks rise from their lows, whilst many other stocks also recovered from the late 2018 sell-down.
However, many of the recent points added to the XJO index have come from the iron ore miners, following the collapse of a dam at a mine in Brazil. The dam collapse was catastrophic and led to the deaths of many locals.
The collapse has been labelled the worst environmental disaster in Brazil’s history, and it followed another significant Brazilian dam collapse at an iron ore mine in 2015.
Vale SA, the worlds biggest iron ore miner, owned the mine at which the most recent collapse occurred, and it owned 50% of the mine from the 2015 collapse. It is planning to reduce its iron ore exports by around 10 percent.
Iron Ore prices went ballistic due to the collapse, and the declaration of reduced supply. However, there are increasing calls that iron ore has overshot to the upside and is likely to fall from here; in fact, it may have started already.
Chinese imports of Iron Ore fell to a 10-month low in February, with a 9 percent reduction in volume from the levels of January. Whilst there are seasonal factors that may affect the February numbers, the import volumes were still 1.5 percent below the levels of February 2018.
Indeed, despite the lower volumes, Chinese port inventories of iron ore rose to a five-month high on the 1st of March.
These factors appear to be starting to affect the price of iron ore, with prices on the benchmark 62% iron ore index down 7.5 percent from the highs of early February. Many are putting this down to concerns around weakening Chinese growth, and more stringent environmental regulations.
“[Iron ore] inventories at ports have risen for the past five weeks, going against expectations of a fall following supply disruptions in Brazil. However, it’s been debates about the prospects of Chinese steel demand that have kept investors cautious.” According to analysts at ANZ bank.
It is no surprise then that many are forecasting that iron ore will fall from its current perch above $80USD per tonne. For example, London based metals analysts Liberum forecast that it will trade between $50-$70 USD this year, whilst HSBC expects the ferrous metal to average $67USD a tonne this year.
Whilst the reduction in Brazilian iron ore supply may help to support prices in the short-term, I would expect that iron ore prices will continue to move lower from here; if this is the case, some of the share prices of ASX listed iron ore miners are also looking a bit elevated.