Why the iron ore price is ‘not out of the danger zone’

A group of three men in hard hats and high visibility vests stand together at a mine site while one points and the others look on with piles of dirt and mining equipment in the background.A group of three men in hard hats and high visibility vests stand together at a mine site while one points and the others look on with piles of dirt and mining equipment in the background.

The iron ore price has dropped from above US$120 a few weeks ago to less than US$110. The price an ASX iron ore share gets for its production can have a key impact on profitability, which is why there has been pressure on the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Ltd (ASX: RIO) share price and the Fortescue Metals Group Ltd (ASX: FMG) share price.

Over the past month, the Fortescue share price is down 7%, the BHP share price is down 4% and the Rio Tinto share price is down 5.6%.

The investment bank Morgan Stanley thinks that the iron ore price could fall even further, according to reporting by The Australian.


Morgan Stanley is suggesting that there is going to be an oversupply of iron in the coming months.

That’s because China’s steel production is “catching up with the reality of sluggish underlying demand”, according to Morgan Stanley’s commodity analysts. We have seen reports of China’s economy not rebounding strongly after COVID-19 lockdowns ended in the country.

One of the issues for iron is that China’s peak steel output ‘season’ ended about a month earlier than it did during the last two years.

Morgan Stanley reportedly noted that “relatively stable” iron ore port inventories imply that the market isn’t significantly oversupplied as of yet, but this could be about to change and hurt the iron ore price.

The suggestion by the investment bank is that more steel production cuts are needed on top of what has already occurred in China, while the iron ore supply is ramping up, which could lead to a surplus.

The Australian reported on analyst comments regarding the danger zone:

At $US106/t, the iron ore price remains above cost support and is not out of the danger zone yet. Last year, the price kept trending lower from April to October, a dynamic we could well see this year again.

What could this mean for iron ore miners?

BHP, Rio Tinto and Fortescue are three of the iron ore miners with the lowest production costs globally, so even at US$100 per tonne or US$90 per tonne, they can make decent money.

But, if the iron ore price falls it would likely mean that those three ASX mining shares would make less profit because they would get less revenue for the same amount of production.

However, if the iron ore price does fall it could make some other high-cost iron ore miners decide to lower their production, which would help the global supply and demand relationship, and hopefully boost the iron ore price.

I think the iron ore price has proven to be very cyclical over the past five years. If it does keep falling, I believe that could end up being a medium-term buying opportunity for investors because of the cyclical nature of iron ore demand. However, there’s no certainty at all that the iron ore price will recover back to its former heights this year.

The post Why the iron ore price is ‘not out of the danger zone’ appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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