Iron ore continues its descent: is the market a trap or treasure?

Market Updates

After hitting US$233 per tonne in May, for the first time in a little over a year, iron ore prices dipped below the US$100 per tonne mark, last Friday.

That marks a spectacular ~57% reversal for the all-important commodity, which has, over the last year, been instrumental in propping up Australia’s export earnings, the economy, and arguably the Australian dollar.  

For reference, iron ore exports make up close to half of Australia’s export earnings, last forecast to contribute $149 billion out of $310 billion in total forecast export earnings across 2020-21. 

Besides shoring up the economy more broadly, Australia’s big three miners – BHP Group, Rio Tinto, and Fortescue Metals Group – which all bear significant exposure to iron ore have seen their share prices mostly mirror the trajectory of the commodity. 

On the way up, for investors the ride was likely exhilarating. More recently however it resembles a race to the bottom. Fortescue saw its share price carved up on Friday, it fell more than 11% as iron ore went below US$100 and sentiment soured further. 

The Jaaims Smart Portfolio has returned 23.5%* since inception. Learn more about those results here.

Despite recent share price declines, the promise of chunky dividends from the big three has likely drawn in many investors and speculators over the last two years. To be sure, that promise has been very much realised: in the last year alone BHP has paid out US$15 billion in dividends, while Fortescue has dished out A$11 billion to investors.

For all these shareholder friendly moves though, it’s worth asking: have these stocks now become dividend traps? Indeed, a high dividend, when coupled with falling share prices, becomes a undoubtedly problematic proposition for investors.  

Ultimately, how long the big three will be able to maintain elevated yields – in the face of falling iron ore prices – remains to be seen.

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*All returns are net of fees and in AUD. Calculations are based on our monthly Professional subscription using our smart portfolio trading all markets covered by Jaaims with a starting fund of AUD$250,000, average position size of $5,500 per trade or 2.2% of funds. Trades fees are calculated utilising retail brokerage rates and multi-currency accounts provided by Interactive Broker. The calculation is from 1 July 2020 to 30 June 2021. Distributions are reinvested, after ongoing fees and expenses but excluding taxation. Actual performance will vary depending on broker selection, position size and stocks selected by the user. Past performance is not a reliable indicator of future performance and will be subject to investment risk as returns are derived from share markets.

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