Shares in many FTSE 100 mining majors are falling today after a broker downgrade due to warning signs in the iron ore market.
Rio Tinto (RIO) was the biggest faller, with its shares dropping 4% to £46.37, while Anglo American (AAL) fell 3.2% to £21.88 and BHP (BHP) dipping down 3.3% to £19.74.
The moves come after broking firm Liberum downgraded all three from Buy to Hold following a number of recent data points which suggest that the iron ore market might have peaked.
TOO MUCH SUPPLY
Liberum flagged that, unusually for this time of year steel traders have been restocking inventories, while iron ore is building up at ports and profitability for steel mills in China has fallen to break-even levels.
Meanwhile Chinese supplies of scrap steel and domestically-mined iron ore appear to have accelerated.
All of this means that the price of iron ore will probably start to fall, spelling bad news for the aforementioned miners, all of whom are in the top 10 biggest iron ore producers in the world.
Iron ore currently trades at around $119 per tonne, but Liberum sees this dropping to $100 per tonne in the second half of this year.
DIFFICULT FOR MINERS TO RALLY
While iron ore isn’t the only thing these miners produce, the fact that it makes up a big part of their earnings means there might not be much upside in their share prices.
Given the high profit margins on iron ore - it can cost as little as $13 a tonne to extract - the big mining firms typically try to dig as much as they can out of the ground all the time.
Liberum said, ‘Even though we see limited downside (and even upside risk) in copper and aluminium here as credit growth accelerates further, the scale of iron ore’s contribution to sector earnings, even when a low multiple is applied, means stagnant or weaker prices will make it difficult for these stocks to rally.’
DEFICIT TO DISAPPEAR 'SOONER THAN EXPECTED'
This is a sharp change in mood compared to just a few weeks ago, when shares in Rio Tinto, Anglo American and BHP rallied as iron ore prices hit a five-year high of $126 per tonne.
The price of iron ore has risen 70% this year, and the major miners have been big beneficiaries, but the dramatic drop in Chinese iron ore stockpiles that saw inventories hit a two-year low has since reversed.
In addition, Liberum sees the current deficit in the seaborne market, i.e. iron ore shipped to other countries, disappearing ‘sooner than expected’.
