Some of the world’s biggest mining companies are battling a plunge in the price of iron ore, prompted by the deadly coronavirus outbreak in China.
Shares in BHP, Rio Tinto and Fortescue Metals Group — three leading producers with huge operations in Australia — have tumbled this week owing to fears the epidemic could dent China’s demand for raw materials. Iron ore is used to make steel for infrastructure and other construction projects.
The price of benchmark Australian ore for immediate delivery into China has dropped $9.80, or 10.3 per cent, to $85.60 a tonne over the past week, according to a price assessment from S&P Global Platts.
That price fall has cut billions of dollars from the market value of BHP, Rio and Fortescue, which also had to contend with a share sale from China’s Hunan Valin Iron and Steel Group, one of its biggest shareholders.
“Steel prices [have] come under pressure as demand is falling away,” said Simon Thackray, an analyst at Jefferies.
China produces around 1bn tonnes of steel a year and consumed almost 1.5bn tonnes of iron ore last year — around 70 per cent of global seaborne supply.
Tyler Broda, an analyst at RBC Capital Markets, said a shock to economic activity could cause a “financial stress event” and might be particularly troublesome for China’s debt-laden property sector, an important driver of steel demand.
“On the positive side, we believe Chinese policymakers will be acutely aware of this and [are] likely to provide emergency financing which could help to moderate impact,” he said.
Beijing could also raise spending on infrastructure and property projects — as it has done numerous times over the past decade — to support growth, Mr Tyler added. “This will probably further erode the longer-term outlook but could allow for the sector to have a sharp recovery.”
Despite a recent sell-off, iron ore prices remain high. With prices at $85 a tonne, BHP, Fortescue and Rio, which can produce the material from their mines for as little as $15 a tonne, will still generate huge profits from iron ore. They will probably announce bumper dividends when they post annual results in February.
In addition, iron ore prices could find support from Brazil on signs that Vale, the world’s biggest producer, has made a weak start to the year because of heavy rains and flooding in the south of the country.
Still, this week’s share price falls have highlighted the dependence of BHP, Fortescue and Rio — and more widely the Australia economy — on iron ore and China.
The pain in the mining sector comes after the Australian economy, which has not experienced a recession in three decades, had already been hit by bushfires over the past few months. That means the risk to Chinese tourism comes at a difficult time.
Chinese tourism is worth A$12bn ($8.1bn) a year to Australia’s economy, according to Australian Tourism Industry Council head Simon Westaway.
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January 30, 2020 at 08:37AM
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Coronavirus outbreak hits mining shares after iron ore falls - Financial Times
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