Iron ore prices are currently trending around $220.50 per ton — more than double the last year’s levels. In fact, in June last year, iron ore prices had breached $100 per ton mark for the first time since August 2019 driven by China’s massive infrastructure stimulus amid supply concerns from coronavirus-impacted Brazil. The situation this year has not changed much, with demand-supply imbalance favoring the prices of the steel making ingredient this year as well, leading to a year-to-date gain of 39%.
As of now, prices are being supported by a decline in portside stockpiles in China.. Imported iron ore stocked at Chinese ports declined for four consecutive weeks to 123.95 Mt (million tons) as of Jun 25, 2021 — the lowest level in eight months. On top of this, weekly Australian iron ore shipments have been disappointing through June. Iron ore prices are gaining further thanks to increasing concerns over Brazil’s supply. Brazilian miner, Vale S.A VALE recently announced that it has halted production at its Timbopeba mine and part of its Alegria mine following a warning from an authority about tailings dam risks. The closures will reduce its iron ore output by around 40,000 tons a day.
Meanwhile iron ore demand from China is gaining from rise in infrastructure spending and renewed vigor in manufacturing activity. Despite the China government’s efforts to curb steel output to reduce carbon emissions, demand for iron ore showed resilience as mills that were not subject to output curbs continued to ramp up production. Healthy profit margins buoyed by higher demand and a rally in steel prices have led to a rise in production. Per the World Steel Association, global crude steel production was up 16.5% year over year to 174.4 Mt in May. This was primarily driven by record high production from China on the back of firm domestic demand and healthy margins at mills. Steel production in China, which accounts for more than half of the global steel output, went up 6.6% year over year to 99.5 Mt in May.
Among the other major Asian producers, India witnessed a 46.9% surge in production to 9.2 Mt in May as steel demand is picking up in the country following the resumption of industrial activities with the lifting of lockdowns and restrictions. In North America, crude steel production climbed 47.7% to 10.1 Mt in May with the resumption of operations across major steel-consuming sectors, leading to a recovery in capacity utilization and domestic steel production.
The World Steel Association projects steel demand to grow 5.8% in 2021 and reach 1,874.0 million. China's steel demand is expected to improve 3.0% this year. Further, the ongoing recovery in automotive and constructions sectors across the world will drive demand for steel and thereby for iron ore. In the United States, massive government spending to rebuild infrastructure including railroads, highways and bridges will significantly boost steel demand, thus raising the requirement of more iron ore.
Industry Outperforms S&P 500 & Broader Sector
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In tandem with iron ore prices, the Zacks Mining – Iron industry has gained 119.9% in a year’s time, outperforming the S&P 500 and the Basic Materials sector’s rally of 40.4% and 46.7%, respectively.
The industry currently carries a Zacks Industry Rank #4, which places it in the top 2% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
3 Iron Ore Stocks to Scoop Up
We have handpicked three iron mining stocks that are well-poised to ride on the rally in iron ore prices. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have outperformed the S&P 500’s growth in the past year. These also have solid earnings growth projections.
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BHP Group BHP: Headquartered in Melbourne, Australia, BHP engages in exploration, development, and production of oil and gas properties; and mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal. The company produced 248 Mt of iron ore in fiscal 2020. BHP anticipates producing between 245 Mt and 255 Mt of iron ore in fiscal 2021. Efforts to make operations more efficient through smart technology adoption across the entire value chain will aid in reducing costs, thereby bolstering the company’s margins. Its focus on lowering debt is also commendable. The company has four major projects under development in petroleum, iron ore and potash, which will drive growth in the long run.
The company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year improvement of 86.5%. The consensus estimate has moved up 3.8% over the past 30 days. The stock has appreciated 49.5% in the past year. It flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rio Tinto plc RIO: Headquartered in London, the U.K., Rio Tinto engages in mining of aluminum, silver, molybdenum, copper, diamonds, gold, borates, titanium dioxide, salt, iron ore, and uranium. The company produced 333.4 Mt of iron ore in 2020. Rio Tinto expects to produce 325 Mt to 340 Mt of iron ore in fiscal 2021. The company boasts a world-class portfolio of high-quality assets and continues to strengthen it by increasing investment in high-value projects to ensure long-term growth. It also remains committed to making its operations as efficient as possible through the use of technology and innovation, including automation. A strong balance sheet and a disciplined capital allocation support its ability to sustain production, increase investment in development projects (in high-return iron ore and copper), while delivering superior returns to shareholders.
The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year improvement of around 104%. The consensus estimate has been revised upward by 16% over the past 60 days. The Zacks Ranked #1 stock has gained 53% in a year.
Vale: Rio de Janeiro, Brazil-based Vale produces and sells iron ore and iron ore pellets for use as raw materials in steelmaking in Brazil and internationally. The company produced 300 Mt of iron ore in 2020. Backed by the start-up of new iron ore assets, the company expects to achieve 350 Mt capacity by 2021-end and 400 Mt per year by the end of 2022. It remains committed to introducing more high-quality ore in the market. Vale’s efforts to improve productivity and cut costs will aid margins. Further, investment in growth projects and efforts to lower debt will benefit it.
The company has a long-term estimated earnings growth rate of 32.4%. The Zacks Consensus Estimate for fiscal 2021 earnings suggests year-over-year growth of around 154%. The consensus estimate has moved north by 27% over the past 60 days. The company delivered a trailing four-quarter earnings surprise of 4.1%, on average. In a year’s time, the stock has gained 122%. It currently sports a Zacks Rank #1.
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