Materials

Morgan Stanley's outlook for iron ore, as BHP hits all-time high

Thu 12 Jan 23, 1:39pm (AEST)
BHP Iron Ore Train
Source: iStock

Key Points

  • Morgan Stanley perceives more upside for the iron ore price
  • The investment bank has given iron ore a target price of US$140/tn for Q2 of 2023
  • Morgan Stanley analysts watching China's new iron ore purchasing body closely

There is an incredible focus on the materials sector right now, given its resurgence.

The ASX Materials sector recently hit levels not seen since April last year. As noted in a recent Market Index Morning Wrap, there is currently a high correlation between the ASX 200 and the materials sector.

It seems that how the big miners trade is having a greater-than-usual impact on the direction of the overall market. And with BHP (ASX:BHP) comprising around 10% of the index and recently hitting all-time highs, it’s easy to understand why.

But can commodity and material stock prices remain elevated?

A lot of that will depend on what happens with the iron ore price, something that Morgan Stanley recently weighed in on via a research note.

First and foremost, MS notes that even though iron ore has had a remarkable run - up 53% since just November last year – there is room for more upside.

MS is targeting an average price of US$140 per tonne for 2Q23, although they acknowledge that the ride could be bumpy.

Centre of attention

The research note goes on to discuss the Chinese government’s desire to launch a centralised iron ore purchasing entity, the goal of which would be to “strengthen supervision on excessive speculation”.

MS suggests that this entity will change the power balance in the iron ore market, and argues that “this could be the biggest market shake up since the end of the annual contract system back in 2010.”

The entity, called China Mineral Resources Group (CMRG), will begin by purchasing iron ore for the country’s 20 biggest steel companies, with the endgame being that all major steel companies will have their purchasing done by CMRG.

From Morgan Stanley; “The country's top 20 steel firms produce about 580Mt of crude steel, which would require around 750Mt iron ore. To put this in context, this is only a little bit less than the combined supply from Rio Tinto, BHP and Fortescue.”

The final word

Whilst some things will change, ultimately, MS sees little long-term impact, saying that the big miners are unlikely to offer structural discounts, meaning a lower through-the-cycle average price is an unlikely outcome. Furthermore, MS does not believe iron ore has been structurally overpriced in the current market.

What MS does foresee, is lower peaks in the iron ore price. The CMRG will have the ability to stockpile ore and offer it to steelmakers in need when demand peaks, avoiding the bidding wars that have previously driven prices (albeit temporarily) up to US$200 per tonne.

The CMRG will ultimately smooth out those peaks in times of severe tightness. Looking further ahead, MS expects iron ore demand to stagnate in coming years.

China’s goals to reduce its iron ore dependency by increasing scrap and developing its own projects overseas, which CMRG will oversee, are noted headwinds.

A look at BHP's five year charts fives context to the company's all time high
A look at BHP's five-year charts gives context to the company's all-time high

 

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Written By

Chris Conway

Managing Editor

Chris is the Managing Editor at Livewire Markets and Market Index. His passion is equity research, portfolio construction, and investment education. He is also very keen on the powerful processes that can help all investors identify great opportunities and outperform the market, and wants to bring them to life and share them with you.

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