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Stock Strategist Industry Reports

Rally in Prices Not Ironclad

Temporary tightness should abate as demand falters and supply surges.

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Iron ore prices have surged and leveraged mining stocks have more than doubled since February. We think this rally is unsustainable, as it is based on short-lived demand measures and near-term supply disruptions. As temporary tightness in the market abates, iron ore prices should fall to $30 per tonne in the long term, driven by falling Chinese steel demand and rising scrap availability. We believe iron ore and metallurgical coal miners are overvalued, with the shares of  Anglo American (NGLOY),  CSN (SID),  Fortescue (FMG),  Teck Resources (TCK), and  Vale (VALE) now trading at more than 2 times our respective fair value estimates.  BHP Billiton (BHP) and  Rio Tinto (RIO) also appear overvalued.

Demand Stimulus, Supply Disruptions Have Driven Rally in Iron Ore Prices
We believe that a combination of Chinese demand stimulus and supply disruptions has driven iron ore prices from their low of $37 per tonne in December to as high as $69 recently. This rally brings prices back to figures not seen since the beginning of 2015, when cost curve levels were higher. Since then, cost-cutting and producer currency depreciation have shifted the curve downward. We believe this rally will prove fleeting as the drivers that brought about this rally give way to faltering Chinese demand and expansion of low-cost supply.

David Wang, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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