logo-loader
viewRio Tinto plc

RBC Capital Markets raises concern about iron ore price amidst continuing coronavirus uncertainty

The dynamics of supply and demand in China will play a crucial role

Rio Tinto plc - RBC Capital Markets raises concern about iron ore price amidst continuing coronavirus uncertainty

To date the iron ore price has held up relatively well in the face of the headwinds presented by the coronavirus. In part this is because of the sensitivity of the price to supply disruptions such as that caused by the recent Cyclone Damien. That storm removed an estimated 20mln tonnes from global supply, according to analysis undertaken by RBC Capital markets, and is likely to put the overall market into a modest deficit for 2020.

It’s in that context that the iron ore price is back at pre-coronavirus levels.

But it might not stay at there for long, according to RBC.

With economic activity, especially in the construction sector, still at an effective halt, steel inventories have started to build. This normally happens in February anyway, but RBC calculates that China's steel inventories are now 42% higher than they have historically been at this time of year.

With blast furnaces unable effectively to curtail production, and with what appears to be a slower restart to economic activity than was anticipated a couple of weeks ago, this inventory build is likely to extend further into March.

A combination of higher iron ore prices and higher domestic coking coal prices with higher inventories has moved average Chinese steel profitability negative.

This should lead to a destocking phase, as mills do their utmost to minimise production, which in turn will erode end use iron ore demand.

“We continue to remain concerned that especially before any stimulus is able to kick in that there will be a significant steel demand gap, which is especially pertinent following a year with nearly one billion tonnes of production,” said RBC.

Meanwhile, the US dollar remains strong and Asian currencies are also starting to fall as fears around the coronavirus grows. With the Dalian iron ore market heavily influenced by financial buyers, it’s likely that some recent buying has been from market participants hedging their currency exposure.

“These countervailing factors are likely to keep iron ore prices volatile, but now that supply has resumed from Australia, we continue to expect iron ore inventories will build, which is likely to pressure prices over the coming weeks,” continued RBC.

Notably, iron ore exposed equities have not priced in this recent up move which could indicate a little relative relief in the short-term.

RBC rates Rio Tinto (LON:RIO) an “underperform” and sets a price target of 3,300p) as it would be the most exposed of the London-listed companies to lower prices. Rio’s results are due out on Wednesday.

Quick facts: Rio Tinto plc

Price: 3718.5 GBX

LSE:RIO
Market: LSE
Market Cap: £46.36 billion
Follow

Add related topics to MyProactive

Create your account: sign up and get ahead on news and events

NO INVESTMENT ADVICE

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is...

FOR OUR FULL DISCLAIMER CLICK HERE

Watch

Enthusiasm of Belvoir Group franchisees during crisis has been incredible...

Dorian Gonsalves, chief executive of Belvoir Group PLC, says the company’s franchisees will be ready to go straight out and start letting again as soon as the lockdown is lifted. Belvoir is actively transacting business on all sides except estate agency, where transactions have all but...

13 hours, 52 minutes ago

3 min read