While iron ore benchmark prices remain between US$140-$150 - comfortably north of consensus expectations with upgrades still flowing - Morgans’ expects short-term pressure to come from a trifecta of risks including: Reduced steel mill profitability, healthier iron ore shipments out of WA and Brazil and covid interruptions to logistics.
But based on the gradual improvements in stability to China’s property and financial markets, the broker doesn’t believe short-term headwinds are sufficient to dislodge iron ore prices from recent ranges.
“Steel-intensive infrastructure projects and property construction activity have been popular levers for Beijing in encouraging growth in the past and likely to feature again in the second half of 2022.” The broker noted.
Macquarie echoes similar underlying confidence in the ability of iron prices to hold up in the near-term, and notes sentiment remains positive for steel and iron ore. The broker attributes a pickup in demand - at the following the end of the weak season – to an improvement in both the infrastructure and machinery sectors.
Iron ore traders aren’t so confident, but the broker notes that “industry participants’ sentiment in the near-term steel and iron ore market remains positive this month, albeit just not so strong as the previous month.
Morgans also favours BHP (upgraded to Add) over Fortescue (Hold) based on what the broker regards as unrealistic consensus expectations supporting current market-implied valuations.
Given that their combined iron ore and pellet exports are substantial, Citi believes the risks associated with the Russia/Ukraine war could have far greater impact on the forecasts of iron ore majors than some brokers are currently allowing for.
“Russia/Ukraine are likely to have a material impact on the global iron ore market,’’ Citi noted.
“Due to capacity utilisation being maxed out, reduction of these volumes gives little room for production to increase elsewhere. Now CY22 looks to be heading for a sharply lower seaborne iron ore surplus.”
While some miners have been better at weathering recent staffing issues than others, UBS suspects the chronic staffing shortage, coupled with lingering absenteeism, courtesy of covid, could see some iron ore miners start adjusting their production expectations.
While no iron ore majors have adjusted their guidance yet, last week Gold miner Westgold admitted to losing 3860 hours - 320 front line operational shifts - within around 30 days, which effectively reduces 3-4% off its production this quarter.
In light of these alarming numbers, UBS plans to monitor real-time shipping data for any insights into how the iron ore producers are faring.
While the current high-price environment provides a welcome buffer, the broker expects the covid spread in WA’s mining sector to impact via worker absenteeism of both positive cases and their close contacts, and suspects the pandemic peak is still “weeks away’’.
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