When will BHP, Rio Tinto and Fortescue shares bottom?

Iron ore heavyweights BHP, Rio Tinto and Fortescue seem trapped in a relentless downward spiral as prices for the steelmaking ingredient plummet to levels not seen since the Evergrande-driven selloff in 2022.

While cyclical sectors eventually rebound, offering savvy dip buyers the potential for impressive returns – I'm sure we can all agree that pinpointing the exact bottom is almost impossible.

Iron ore prices recently breached the key US$100 a tonne level, falling as low as US$91 a tonne last week. For those investors that bet on a US$100 as the floor are now left hoping for a bounce.

Morgan Stanley analysts believe iron ore prices should bounce over the next 1-2 months as low prices weigh on supply from marginal producers.

The last four dips

The last four dips below US$100 a tonne all managed to recover within two months, according to Morgan Stanley.

• The Nov-21 selloff troughed at US$87.2 a tonne and spent 16 days below US$100

• The Evergrande selloff of Oct-22 hit a low of US$79.5 a tonne. This was the longest stretch below US$100, totalling 52 days

• The weakness in May-23 was short-lived, with a trough of US$97.4 and spent just two days below US$100

• The dip earlier this year in April hit a low of US$98.3 and recovered back above US$100 just three days later

The last four dips below US$100 a tonne (Source: TradingView)

The current selloff

Iron ore prices are highly sensitive to news flow and sentiment, and this week's remarks from some of China's top steelmakers have alarmed the market, says Morgan Stanley.

The steel industry “winter”, or crisis, was likely to be “longer, colder and more difficult than we expected”, said Hu Wangming, chair of China Baowu Steel Group, the Financial Times reported.

He warned that current steel market conditions may be more severe than the downturns experienced in 2008 and 2015.

His remarks were further compounded by recent Chinese economic data, which flagged:

• New construction starts fell 20% year-on-year in July, only a slight improve from June's 22% fall

• Property investment in China fell 10.2% in the first seven months of the year

• China's steel exports fell 10% month-on-month in July, marking a slowing in the annualised run-rate to 88 million tonnes, down from 110 million tonnes earlier this year

• July crude steel output down 9.5% month-on-month and 9% year-on-year

• China's portside iron ore inventory is sitting around a one-and-a-half year high

Steel exports have eased sharply in recent months(Source: Morgan Stanley)

Annualised steel output has echoes of 2022 (Source: Morgan Stanley)

Where to from here?

"The weight of China steel pressure looks likely to bring further price slippage in the very near term," says Morgan Stanley

"Monthly prices have bottomed well above the 90th percentile of the cost curve in the last 3 years, assessed today at US $75-80 a tonne (FOB cash basis) but daily spot could trough closer to this as in Oct-22."

"But sub-100 levels should be contained to <1-2 months, given an efficient supply response from marginal units."

The primary risk to this outlook is a more severe economic slowdown in China, compounded by decelerating growth in other regions. As we approach the December quarter, analysts highlight two crucial indicators to monitor: The 10-day CISA steel output series and monthly World Steel production data.