The upgrade is driven by new supply dynamics - in other words, potential shortages - brought on by environmental restrictions in some regions, stricter emissions controls, and winter cuts.
Price target more than doubled
Analyst Kennedy Nyangoni highlighted that the changing economic environment comes at ‘an intriguing time’ amid annual pellet premium negotiations.
Barclays moved its rating to ‘overweight’ from ‘underweight’, and, more than doubled its price target to 300p from 140p.
The new target suggests some 31% upside versus the present price, which was itself boosted - up 8.5% today at 227.5p.
“Significant increases in spot pellet premiums drive upgrades to our forecasts and price target for FXPO, and should lead to consensus 2019E EPS rising substantially, in our view,” Nyangoni said.
The analyst added: “Spot pellet premiums stand at $78 per tonne FOB vs. $58 per tonne contracted for 2018.
“The recent move has been underpinned by anticipation of broader application of winter cuts starting in October.
“We expect further upward pressure short term from news yesterday that world 2 pellet producer LKAB has shut down one of its mines for ‘several months’ leading to c.1mt of supply losses. Spot prices at the time of negotiation are typically a good guide for the annual contract.”