Iron ore prices rose past $70 per tonne on Wednesday (July 19), surging 7 percent from the beginning of the week and reaching a high not seen since April.
Gains in the futures and steel markets drove the increase, says Metal Bulletin, although the jump also came after major iron ore producers Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) and BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) released their latest quarterly reports.
According to the Financial Review, Rio said its iron ore shipments will come in at the lower end of guidance for 2017, sparking expectations of decreased supply later this year. Meanwhile, BHP showed only a modest year-on-year increase in iron ore production.
BHP’s higher iron ore production was in contrast to a 16-percent decrease in copper production due to a strike at the Escondida copper mine in Chile, plus “unplanned maintenance at Olympic Dam,” which cost the firm $367 million.
Analysts at Morgan Stanley (NYSE:MS) have forecast that gains in iron ore, coal and natural gas prices, coupled with declining capital expenditure, will mean higher dividends for BHP shareholders. The company has set its dividend determination date for August 22. The US banking giant has increased its price target for BHP to $29.75 and gave the stock an “overweight” rating.
In contrast, Citi recently downgraded the company, giving it a “neutral” rating with a $25.50 price target. Citi said its “bearish view on bulk commodity prices presents a key risk to BHP’s medium-term earnings. We prefer buy-rated Rio Tinto as our diversified/iron ore/aluminium exposure.”
Citi expects iron ore prices to average $62 this year, and $50 from 2018 to 2020. “The near-term trough may occur in 6-8 months with spot prices falling to the low-40s,” it says in a report. Similarly, Goldman Sachs (NYSE:GS) has said that increased supply should bring prices down to about $47 in 2018.
Vale (NYSE:VALE), another major iron ore producer, is expected to set another quarterly production record when it releases its Q2 results on Thursday. Vale is anticipated to report Q2 output of 91.4 million MT, up from 86.8 million MT a year earlier, according to a Bloomberg News survey.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.