The share prices of BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) could all suffer this week due to China.
BHP, Rio Tinto and Fortescue are three of Australia’s largest resources businesses, they all produce a significant amount of iron for the global market, where this is particularly high demand from China.
What’s Going On With Iron Ore Prices?
The iron ore price has been on a great run in recent times, hitting a multi-year high recently. That’s largely why the share prices of BHP, Rio Tinto and Fortescue have done so well in 2019.
However, that run may be about to come to an end with the Chinese steel mills complaining about the high iron ore price which reached US$126 a tonne last week. Australian exports and the Australian miners are benefiting, but it’s eating into the profit margins of the steel mills.
Large Chinese steelmakers have created a group to look into “irregularities” according to the Australian Financial Review.
The Chinese steelmakers are blaming iron ore futures traders for the sharp price increases and supposed price manipulation.
Logically, you would think that a rise in the iron ore price would lead to a somewhat similar increase in the steel price to offset the increase in iron ore price, but currently there is a gap in the relationship between the prices of the two commodities.
Problems in Brazil, another large exporter of iron, as well as limited problems in Australia has seen global iron supply be somewhat limited. Demand in China remains high, particularly due to the Belt and Road initiative.
What’s Going To Happen Now?
I’m not sure how much further iron ore prices can climb, we may already have seen the tipping point with investors worried about what China might do to combat these high iron ore prices. No-one can predict commodity prices.
I’m not a fan of investing in cyclical commodity businesses, which is why I’d rather invest in the reliable and proven ASX shares in the free report below instead.
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