Last week, iron ore prices logged the largest gain of 2018, climbing nearly 7% till Apr 19. However, the spot markets of this major steel making product went hard into reverse in Friday’s closing session.
Per the Metal Bulletin, “the spot price for benchmark 62% fines surged 3.9% to $68.45 a ton, leaving it at the highest level in over a month,” on Apr 19. People’s Bank of China’s decision to trim the reserve ratio requirement (RRR) and soaring crude oil prices were primarily the two major catalysts to the rally.
However, Friday’s trading session marked a parabolic-like move, with benchmark 62% fines falling 2% to $68.45 a ton, rescinding much of the improvements secured in the prior session.
Some analysts believe that speculative trading activity in the market backed the price upswing as several rebar traders are now investing in raw materials.
Nevertheless, iron ore prices might soon spring back due to the enactment of Beijing’s monetary easing policy from this Wednesday, apprehension regarding supply shortage, rise in China’s construction demand and the continued upswing in oil prices.
Prices to Gain on Demand Outlook
Long-repressed iron ore prices will steadily gain momentum due to speculation that demand for steel will shortly improve in the chief user market — China.
Iron ore prices stood at $65.05 a ton on Friday, gaining nearly 1.8% over the whole week. Beijing’s steel futures touched a five-week high on Monday, prompted by declining stockpiles that indicated an improvement in construction demand. Steel demand in China is typically the sturdiest in April and May, when its construction activity is at its busiest phase.
The strength in Beijing’s steel market will likely spread to its raw materials like coking coal and iron ore.
Iron-ore prices on the Dalian Commodity Exchange, climbed 2.7% to 479.50 yuan a ton, this Saturday. Prices are now in a comeback trail, with spot markets being active and trading volumes escalating, especially in the Tangshan and Shandong ports. Additionally, the most-active rebar futures are recording gains in the Shanghai trading, thereby boosting iron ore prices northward.
Furthermore, the new policy to be implemented by China’s central bank will likely bolster demand for steel and its inputs going forward.
On Apr 17, the People’s Bank of China surprisingly revealed its intensions to slash the reserve ratio requirement (RRR) by 100 basis points from this Wednesday. Subsequent to this, prices of steel and its raw constituents have been rallying, in anticipation that the monetary loosing will boost economic activity and support Beijing’s real estate projects.
Per a Shanghai-based iron ore merchant, “What our central bank did will give some support to real estate projects, so there should be support for steel demand in the short to medium term.”
In sync with this, the market foresee that Chinese steel mills will be restocking demand for raw materials, after gaining impetus to boost productivity for wider margins.
What Else Pulled Prices Up?
Amended iron-ore production outlook from the world’s third largest supplier, BHP Billiton Limited BHP, has spread anxiety among traders since last week.
The mining behemoth has lately lowered its iron-ore production guidance range by 2% for fiscal 2018 to 272-274 million tons, citing its ongoing car dumper reliability problems.
“The reduction in BHP’s output forecast was marginal and could be filled by other suppliers,” per the Shanghai trader. Though the impact on worldwide supplies is restricted, the statement has spread fears of scarcity across the mining belt, aiding the long-depressed prices to spring back.
Moreover, the unexpected bout of enthusiasm in iron ore prices is driven by an upswing in crude oil prices — a major mining sector input cost.
The West Texas Intermediate crude futures nudged up 0.4% to end at $67.07 per barrel on Apr 12 — the highest since December 2014. The surge in benchmark crude stems from escalating Middle Eastern tensions and fears of interruption in supplies. Crude is also riding high on the shoulders of other catalysts like strong global demand and continued production curbs from the Organization of the Petroleum Exporting Countries and its allies.
Stocks in Focus
Despite the softening in Friday trading, we perceive enough space for iron ore prices to move north in the near term.
Over the last month, the Zacks Steel industry has advanced 8.8%, outperforming the 0.6% gain recorded by the benchmark S&P 500 index.
Additionally, the industry has a trailing 12-month EV/EBITDA multiple of 4.8, lower than the S&P 500 EV/EBITDA multiple of 11.3. The industry’s lower-than-market positioning indicates room for some upside moving ahead.
Escalating steel demand and northward movement in iron ore prices will likely benefit the stocks grouped under the steel industry. However, contradictory perceptions regarding ongoing speculative moves remain causes for concern.
We have zeroed in on four mining stocks that investors might include in their portfolio to benefit from a possible upsurge.
Besides a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), these companies have some positive sales and earnings forecast for the current year. Notably, on a month-to-date basis, these stocks have performed better than the broader Zacks Basic Materials sector (including the mining industries).
Since the beginning of April, the sector’s growth has outperformed the 1.3% gain recorded by the benchmark index.
Let’s delve deeper to have a fair idea of the stocks’ individual skill sets.
Mining Stocks in Focus on Unpredictable Iron Ore Prices: Golden Minerals Co (AUMN)
Golden Minerals Co (NYSEAMERICAN:AUMN) engages in construction, mining and exploration of mineral properties.
The stock’s projected sales and earnings growth for 2018 is currently pegged at 0.13% and 25%, respectively.
On a month-to-date basis, Golden Minerals’ shares have gained 4.5%, outperforming the 3.3% growth recorded by the sector.
The company sports a Zacks Rank #1.
Mining Stocks in Focus on Unpredictable Iron Ore Prices: Glencore Plc (GLNCY)
Glencore Plc (OTCMKTS:GLNCY) engages in the refinement, production, processing and marketing of energy products, metals and minerals, and agricultural products in the global forum.
The company currently holds a Zacks Rank #2. The stock’s projected sales and earnings growth for 2018 is currently pegged at 43.9% and 30.8%, respectively.
On a month-to-date basis, Glencore’s shares have rallied 6.3%, outperforming the sector’s gain.
Mining Stocks in Focus on Unpredictable Iron Ore Prices: BHP Billiton plc (BBL)
BHP Billiton plc (NYSE:BBL) acquires, discovers, develops, and markets natural resources globally. The company operates through four segments: iron ore, coal, copper and petroleum.
The stock carries a Zacks Rank #3. The company’s projected sales and earnings growth for fiscal 2018 (ended June 2018) is currently pegged at 44% and 33.6%, respectively.
On a month-to-date basis, BHP Billiton’s shares have rallied 7.4%, outperforming the sector’s gain.
Mining Stocks in Focus on Unpredictable Iron Ore Prices: Vale SA (VALE)
Vale SA (NYSE:VALE) produces and sells iron ore pallets and iron ore in Brazil and other overseas end-markets.
The stock carries a Zacks Rank #3. The company’s projected sales and earnings growth for 2018 is currently pegged at 6.1% and 8.2%, respectively.
On a month-to-date basis, BHP Billiton’s shares have rallied 10.1%, outperforming the sector’s gain.
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