US bank Jefferies has released a research note stating that its analysts have been positive on iron ore for the past six weeks, due to the potential for a China reopening and seasonal supply issues.
The rally in iron ore prices has occurred, up from $76 per tonne on October 31 to $112/t last week. However, the outperformance of iron ore relative to copper has likely played out, the bank's analysts think
Despite this, the Jefferies' analysts still see good value in shares of Rio Tinto PLC (LSE:RIO), BHP Group Ltd (LSE:BHP, ASX:BHP) and Vale SA.
Policies 'more accommodative'
They attribute the rally in iron ore prices to an improving outlook for the Chinese economy and believe that more accommodative policies with respect to Covid and the property market will lead to stability in demand for iron ore.
However, the Jefferies analysts do not expect a strong recovery in demand as Chinese property, which accounts for around 35% of iron ore demand in the seaborne market, is likely in structural decline.
Overall, Chinese steel production should track demand, and they expect only a small increase, if any, in China's steel production over the next year.
Iron ore supply is also expected to be roughly flat year-on-year, as the major miners are not increasing production significantly, investors were told.
The Jefferies' analysts expect a balanced market with prices in the $90-110 per tonne range for 2023. The consensus view is that iron ore prices will normalize to the $70-80 per tonne range, and this will happen soon.
However, the analysts expect periods when the price will be in this range, but it believes that a value-over-volumes approach for the major miners and a steepening cost curve will lead to a long-term average price of at least $90 per tonne.
In contrast, they believe that the period of relative outperformance of iron ore in mining is over and that copper is a better commodity to invest in for a ‘12+ month horizon’.