Why ASX iron ore miners may outperform this morning

Our market is likely to drop this morning but there’s one group of ASX stocks that are poised to buck the downtrend.

The futures market is predicting a 0.4% fall in the S&P/ASX 200 Index (Index:^AXJO) as unbridled  violence in the US, geopolitical tensions with China and the ongoing COVID-19 pandemic takes the wind out of our sails.

The thin silver lining to the global coronavirus outbreak is that it’s pushed the iron ore price to over US$100 a tonne on the weekend.

Can bulls fly?

This might be enough to see the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price jumping higher when the market opens.

I say “might” because there are doubts that the commodity bull run may be very short lived and that prices could start correcting as soon as next month. I wonder what is the reverse analogy of a “dead cat bounce”? Maybe “bulls growing wings”?

But the uncertain outlook hasn’t stopped the iron ore benchmark from jumping to US$101.05, according to Bloomberg.

Why iron ore miners may outperform still

Our biggest iron ore rival, Brazil, is quickly becoming the epicentre of the COVID-19 crisis as it recorded another surge in new infections.

This is anticipated to cause major disruption to ore exports from that country with Vale SA downgrading its full year shipment forecast for the commodity in April.

At the same time, China’s industries are reopening as the country overcomes the pandemic. This is driving up demand for the steel-making ingredient.

Chinese stimulus

Chinese leaders have also announced a 3.6 trillion yuan ($760 billion) stimulus package to help pull its economy out of the coronavirus rut.

While the package was smaller than what the market was hoping for, it will still bolster infrastructure construction – a key driver for iron ore demand.

The Chinese government said expenditure on investment projects will rise by 22.4 billion yuan this calendar year to 600 billion yuan.

Is a market correction looming?

However, this isn’t enough to stop some experts from predicting a downturn in the iron ore price in the second half of 2020 after it hit its highest level since August last year.

Bloomberg Intelligence expects a 34-million-ton surplus in the second half on higher supply and stagnating demand, compared to a 25-million-ton deficit in the first half.

Other experts like Credit Suisse have also warned that we are currently in “peak tightness” and that rising output from Brazil and Australia will ease the shortage in July or August.

Foolish takeaway

On the other hand, it’s hard to predict what impact the COVID-19 fallout will have on Brazil over the coming weeks or months.

There’s also the belief that China will inject another round (or three) of stimulus if its economy starts to sputter – whether from the pandemic, the trade war with the US, or both.

More reading

• ASX 200 Weekly Wrap: Surging bank shares push ASX toward 6,000
• 5 things to watch on the ASX 200 on Monday
• ASX investors brace to ride the next wave of “irrational exuberance”
• These were the best performing ASX 200 shares in May
• Buy these quality ASX dividend shares next week

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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