Iron ore prices
In April, the price of seaborne iron ore fell to a decade low. The fall was led by a waning demand amid supply expansions by players. After that, weather-related supply disruptions from Australia and Brazil caused iron ore port inventories in China to fall. This led to restocking-driven demand, which saw iron ore prices go above $60 per ton.
The restocking-driven rally was cut short by the fall in the Chinese equity market and weak data out of China. This again led iron ore prices to flirt around with decade-low price levels.
Iron ore stock price performance
The second quarter of 2015 hasn’t been good for iron ore equities. Most of them lost significant value during the quarter. They were impacted by various factors. The most important factor was the supply glut by major iron ore producers, including BHP Billiton (BHP), Rio Tinto (RIO), and Vale S.A. (VALE). Equities were also affected by weaker-than-expected demand growth from the world’s largest iron ore consumer: China.
BHP and RIO have been the best performers in the iron ore space with a year-to-date fall of 6.2% and 12.8%, respectively, compared to the drop in iron ore prices of 27.5%. Vale lost 31.6% of its value, while Fortescue Metals Group (FSUGY) and Cliffs Natural Resources (CLF) lost 37% and 53% year-to-date, respectively.
BHP Billiton and Rio Tinto have reduced their per-unit costs significantly over 2014 and 1Q15. This is helping them remain profitable even under the depressed iron ore price environment.
Vale still has a long way to go with the S11D iron ore project. This project will lower the company’s overall production cost. However, Vale needs funding to complete the project. Its cash flow requirement and the greater distance to Asia compared to BHP and RIO are the primary reasons for its relative underperformance.
For pure plays and smaller players like Fortescue and Cliffs, the remaining margin cushion is too low at current levels, making them much more sensitive to iron ore prices. Cliffs’s high debt also isn’t helping its stock price.
ETFs such as the SPDR S&P Metals and Mining ETF (XME) are good ways to get exposure to this sector without picking individual companies. Cliffs forms 2.8% of XME’s holdings.