FMG loses momentum as iron ore prices collapse

Market Updates

Australian iron ore exports are expected to hit $136 billion across 2020-21. That’s equivalent to a staggering ~22% of the country’s total export earnings.

Those expectations were – or have been driven by – a stratospheric run-up in the price of iron ore over the last 18-months. That run, which itself was driven by a seemingly unquenchable demand for the commodity and severe supply-side issues, looks to be coming to an end.

Is the commodities party over?

In recent months, iron ore prices have cratered. Off the all-time high of US$237 per tonne recorded in May, iron ore has fallen a staggering 45%. This comes as China pushes to lower its steel production and signs begin to emerge that we may have passed ‘peak China’ demand.

This has hit iron ore equities hard. Before the start of Monday’s session, Fortescue Metals Group had seen its stock fall close to 20%, BHP Group was down ~13%, and Rio Tinto had fallen ~15%.

The longer-term outlook doesn’t get much better. BHP, as part of its record FY21 results, said:

‘Medium term, China’s demand for iron ore is expected to be lower than it is today as crude steel production plateaus and the scrap-to-steel ratio rises.’

That result from BHP did highlight one thing: it’s not just Australia’s export dollars getting a boost off the recent iron ore boom – so are the mining company’s shareholders. In terms of dividends, BHP has now spun off $15 billion to investors over the last year and over $38 billion in the last three.

Looking forward, pure-play iron ore miner Fortescue Metals Group (FMG) is set to hand down its latest set of full-year results next Monday, August 30. After reporting bumper profits in the first-half of FY21 and issuing a chunky interim dividend of $1.47 cents per share, expectations around the stock are decisively elevated heading into that full-year report.

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