Why Iron Ore Stocks Could Struggle to Hold Ground



Winter cuts to slow iron ore’s rally

As we saw in the previous part of this series, iron ore prices have stood their ground despite growing headwinds for China (FXI). But the question remains if this resilience in prices can continue for the rest of 2018 and beyond if China continues to weaken.

As we discussed in the previous part, one of the factors driving iron ore’s resilience is the stocking up by mills ahead of winter production curbs. As restocking completes and winter cuts kick in, the demand for iron ore from China could take a hit.

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Production continues unabated

In addition, the iron ore production by major miners (XME) including Vale (VALE), BHP (BHP), and Rio Tinto (RIO) continues to be strong. As per the latest quarterly releases from these miners, the production growth was quite strong and is expected to remain strong.

BHP reported growth of 8% in iron ore production YoY to 69 million tons. Vale’s iron ore production hit a record high of 104.9 million tons, implying growth of 10.3% YoY. The start of its S11D mine is behind the significant rise in iron ore volumes. Its guidance also remains strong at 390 million tons for 2018 and 400 million tons in 2019 onwards. Rio Tinto’s iron ore production fell 5% YoY during the September quarter. The company, however, maintained the 2018 production guidance backed by a stronger-than-expected H1 2018.

Slowdown to catch up to steel production

Moreover, the Chinese slowdown is eventually expected to catch up with steel production. The steel mills can’t keep on producing higher steel when the property sector, the auto sector, and other steel consumers are going through a bad phase.


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