Iron Ore Won't Soar Forever
Those miners appear overpriced, but we see value emerging in base metals and coal.
Iron ore and gold prices are flying high, but we don’t think this will last. Iron ore is benefiting from unusually strong demand and supply disruptions while gold is rising with negative interest rates. The global miners remain overvalued, in our view. The sector trades at an average 10% premium to our fair value estimates versus a 20% premium three months ago. The iron ore miners-- BHP (BHP)/(BBL), Rio Tinto (RIO), Vale (VALE), and Fortescue--on average are at a 30% premium, while the rest of our coverage is only at a 4% premium. The coal miners have been soft, and New Hope and Whitehaven now stand out as being relatively undervalued.
We’ve raised our near-term iron ore forecasts meaningfully given higher spot prices, stronger near-term demand from China, and potential for Vale’s supply issues to persist, but our long-term price is unchanged. We now forecast $41 per tonne iron ore from 2023 with our long-term price kicking in from 2023 versus 2022 previously. The Feijao dam failure has yet to play out, and a slower return to normal production from Vale means that elevated iron ore prices can persist for longer. Our metallurgical coal price forecasts also benefit from higher near-term steel production. On the negative side, spot prices for nickel and zinc have fallen with lower industrial production.
Mathew Hodge does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.