Iron ore demand is about to collapse in October, UBS says. Here’s how to trade this.
Demand for iron ore in China may have picked up earlier this month, but Swiss bank UBS says it’s a “short-lived” surge that will soon collapse. The investment bank said it believes earlier demand was partly driven by inventory rebuilding ahead of a week-long national holiday in China that begins Oct. 1, when industrial activity is expected to slow. China is also likely to implement its “Blue Sky” policy, a pollution reduction program, starting in mid-October ahead of the Chinese Communist Party officials’ meeting in Beijing. That means thousands of industrial and chemical plants will be temporarily closed to improve air quality in the region, further curbing demand. This will come at a time when iron ore prices, which are mainly used by steelmakers, have already plummeted in the wake of China’s housing crisis. The Sept. 27 UBS report says global iron ore demand has already weakened as pig iron production, an intermediate product of steelmaking, fell 7% from August last year. Mining companies exposed to the commodity are likely to be impacted by the upcoming change in demand. According to the bank, here’s what the big names in the industry expect: Rio Tinto UBS forecasts that London-listed mining giant Rio Tinto is on track to ship iron ore at the lower end of its earlier forecast. Rio Tinto’s exports from Western Australia are expected to fall 1% in the third quarter of this year compared to 2021, according to UBS. With more than 60% of the company’s revenue coming from the commodity, UBS said the price of iron ore was the stock’s key driver, according to its 2021 results. Though shares are down more than 20% from their recent highs, UBS said there are more downside risks. The investment bank has a price target of £43 ($46) per share for Rio, down 11.7% from current levels. Anglo American Anglo American’s sales from its South African mine are expected to fall 9% in the three months to September, according to the Swiss bank. Iron ore sales accounted for two-fifths of its revenue, according to filings in 2021, leaving the company dependent on the commodity performing well. UBS has given Anglo American a sell rating and a price target of £26 ($28.3) per share. That would be 5% below current levels. Who are the winners? Analysts expect Australian miners BHP and Fortescue Metals to report annual growth in iron ore shipments from their largest mines of 2% and 4%, respectively. But since iron ore accounts for more than half of BHP’s revenue and Fortescue Metals is a single-commodity mining company, its fortunes are closely tied to the commodity’s price performance, the investment bank said. UBS said it is “cautious” when it comes to BHP as it expects commodity prices to fall over the next year or two, which will put pressure on cash flow and yields as capital spending rises. “Cost control will become increasingly important for FMG as iron ore prices decline as expected,” UBS said, referring to Fortescue Metals Group. Shares of BHP are currently trading 7.5% above their target price of AUD$35.50 ($23) and shares of Fortescue Metals Group are 6.2% above their target price of AUD$15.80 ($10.2). $).