Could short-term pain give way to long-term gain for iron ore?

Iron ore’s collapse from giddy highs of upwards of US$230/t to under US$100/t appears to have subsided for now as iron ore prices posted a sharp bounce back above US$120/t last week.

The factors that led to the decline are well documented, primarily mandates from the Chinese Government for Chinese steel makers to keep production flat year-on-year after profit hungry mills produced 12.2% more in the first six months of 2021 than they did in 2020.

The 61% fall in iron ore prices that followed May’s highs shook out a number of small, low grade producers who used the tinder provided by high prices to open direct shipping operations, combining with higher than normal freight costs to send their short-lived operations back into mothballs.

Shareholders in the major iron ore miners have responded to the jitters in kind.

BHP (ASX:BHP) shares hit a record high of $54.06 on August 4 but are now 11.57% down year to date at $38.08. Rio Tinto (ASX:RIO) shares were worth $134.40 on the same day and are now trading at $102.26, while Fortescue Metals Group (ASX:FMG) stock fell 47% from record highs of $26.30 on July 29 to $13.91 last Thursday before recovering to $15 yesterday.

However, prices have staged a minor recovery, climbing back to US$123/t on Friday after two weeks of gains ended a three-month decline matched in percentage terms only by the post-GFC crash in 2008.

While some analysts see iron ore falling even lower next year into the US$75-80/t range, there are some who believe short-term pain could give way to long-term gain for the iron ore sector and, particularly, high grade producers.

 

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