Why it's a bullish time for BHP, Rio Tinto and Fortescue investors

Iron ore prices have historically experienced a strong rally from November through to February, driven by factors such as seasonality and Chinese stockpiling.

While past performance is not a reliable indicator of future return – The historical data suggests a favourable outlook for the steelmaking ingredient.

Iron Ore's Seasonal Performance

Before we dive into the data, it's worth noting that when we refer to iron ore – We're talking about benchmark 62% iron ore fines on the Singapore exchange. There's only 15 years of data available as the contract started trading in November 2008.

Also a shout to my colleague Carl Capolingua for compiling the spicy data.

In the past fifteen years (aka going as far back as possible):

• November performance: +1.7%

• December performance: +10.6%

• Average gain from November through to next February: +18.3%

Source: Market Index

If we look at the data over the past ten years:

• November performance: -1.2%

• December performance: +9.4%

• Average gain from November through to next February: +14.4%

And the past five years:

• November performance: -4.3%

• December performance: +15.2%

• Average gain from November through to next February: +21.1%

The Seasonal Drivers

Stockpiling: China tends to import more iron ore in the second half of the year as steel mills ramp up production ahead of the winter construction season.

Supply disruptions: China may also stockpile more iron ore when there are risks of supply shortages from major suppliers. Iron ore production in Brazil can be affected by heavy rainfall during the summer months (June to September), which can lead to higher prices.

Chinese New Year: The week-long Chinese New Year holidays typically fall between late January and early February, which can lead to temporary disruptions in steel production and construction. Chinese consumers often stockpile iron ore and bring forward steel production in the lead-up to the holidays.

Fortescue's Seasonal Performance

Fortescue (ASX: FMG) is often considered a proxy for iron ore prices. It's pretty clear from the data that it stands to benefit from the seasonal tailwinds.

The median performance over the past fifteen years:

• November: +0.6%

• December: +4.7%

• Performance from November through to next February: +11.0%

Source: Market Index

The median performance over the past ten years:

• November: +5.0%

• December: +5.3%

• Performance from November through to next February: +12.0%

The median performance has become more bullish over the past five years:

• November: +7.1%

• December: +10.0%

• Performance from November through to next February: +23.0%

Take It Easy On the Five Year Data

It's worth noting that the five-year data (for both iron ore and Fortescue) has likely been propped up a few catalysts, including:

• Vale's Brumadinho dam disaster on 25 January 2019. Iron ore prices rallied almost 70% within six months of the tragic incident

• Brazil struggled to get iron ore production back on track after Covid. Underwhelming exports coupled with strong Chinese demand caused prices to rally ~38% between November and December 2020

• China's Evergrande Crisis caused iron ore prices to halve from US$200 a tonne between June 2020 and November 2021. The downward spiral just so happened to stabilise in December. Over the next two months, prices bounced around 33%

• Another downward spiral occurred between March and October 2022, where prices halved from US$160 a tonne to around $77 a tonne. Prices again stabilised in November and rallied around 65% over the next three months

How's November Going?

Iron ore prices are up 2.9% in November, to $122.55 a tonne, and unphased by some of China's recent downbeat economic data, including:

• October manufacturing PMI unexpectedly fell to 49.5 in October from 50.2 in September, dipping back below the 50-point level that separates contraction and expansion

• October services PMI fell more than expected, down to 50.6 in October from 51.7

• Exports fell more than expected, down 6.4% year-on-year in October

This strength has followed through for Fortescue, which is also trading around 3% higher in November.

Fortescue year-to-date chart (Source: TradingView)