Iron ore prices have surged 35.33% so far this year, and as of Sep 18, 2020 were at $124.50 per ton — levels last seen in 2014. Demand for the primary steelmaking commodity has witnessed a surge on strong demand from China as steel production has gained steam in the country driven by its efforts to recover from the coronavirus-induced shutdown. This combined with continued concerns over a supply shortage from Brazil, which has been hit hard by the COVID-19 pandemic, fueled the rally in iron ore prices.
Per the latest data from the World Steel Association, in the January to July 2020 timeframe, global steel production was down 5.3% year over year to 1,027 Mt while steel production in China went up 2.8% to 593 Mt. Over the timeframe, China has imported 659.6 Mt of iron ore, up 11.8% from the prior year comparable period. In July, China produced 93.4 Mt of crude steel — the largest monthly volume on record. Iron ore imports also witnessed year-over-year growth of 24% to a record 112.65 Mt.
Also, the Official NBS Manufacturing PMI in China was 51.0 in August 2020 — maintaining the streak of six consecutive months of increase in factory activity. This is a major recovery from the all-time low PMI reading of 35.7 in February dragged down by the coronavirus crisis-induced lockdown. Excavator sales in China — a leading indicator for construction activity — are also on the rise.
These indicate that China is gradually moving out of the crisis. The country is likely to see a strong steel demand henceforth as it ramps up infrastructure investment, which will support demand for iron ore. The World Steel Association expects Chinese steel demand to increase 1% in 2020. Further, while rest of the world emerges from COVID-19 lockdowns, the ensuing demand for steel will require more iron.
Meanwhile, as Brazil grappled with a worsening coronavirus situation, it raised concerns of an impending supply-demand imbalance. The country is expected to export 310 million tons of iron ore in 2020, lower than the 340 million tons exported in 2019. This scenario worked in favor of iron-ore prices. The Zacks Mining – Iron industry has gained 10.1% over the past three months, outperforming the S&P 500’s growth of 6.2%.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining- Iron Industry, currently carries a Zacks Industry Rank #1, which places it at the top 1% of 256 Zacks industries. 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.
Going by the EV/EBITDA multiple (a preferred valuation metric for mining companies that have high capital expenditures), the iron-mining industry has a trailing 12-month EV/EBITDA multiple of 4.33, lower than the S&P 500’s EV/EBITDA multiple of 14.33.
4 Top Picks
Vale S.A 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 has a long-term estimated earnings growth rate of 21.97%. The Zacks Consensus Estimate for fiscal 2020 earnings suggests year-over-year growth of 7%. The estimate has moved up 19% over the past 60 days. The stock has gained 10% over the past three months, compared with the S&P 500’s growth of 6.2%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Fortescue Metals Group Ltd FSUGY: Headquartered in East Perth, Australia, Fortescue Metals engages in exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. The Zacks Consensus Estimate for the company’s current fiscal year’s earnings has been revised upward by 56% over the past 60 days. The figure currently indicates year-over-year improvement of 95%. The Zacks Ranked #1 stock has gained 24% over the past three months, compared with the S&P 500’s rally of 6.2%.
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 Zacks Consensus Estimate for fiscal 2020 earnings suggests year-over-year growth of 12%. The estimate has been revised upward by 27% over the past 60 days. The Zacks Ranked #1 stock has gained 15% over the past three months, compared with the S&P 500’s growth of 6.2%.
BHP Group BHP: Headquartered in Melbourne, Australia, BHP Group engages in the 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 has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for the company’s ongoing fiscal 2021 earnings indicates year-over-year growth of 14.3%. The estimate has been revised upward by 20% over the past 60 days. The stock, which carries a Zacks Rank #2 (Buy), has gained 11.4% over the past three months, compared with the S&P 500’s 6.2% growth.
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