The iron ore spot price has climbed to 10-month highs following Vale’s decision to suspend iron ore mining at its Itabria site.
Prices are expected to remain high driven by the short-term concern of fewer shipments from Brazil. This is coupled with China’s port inventories being at a 3-year low and rising demand from Chinese steel mills.
Iron ore shortage
Vale’s Itabria mining operations were suspended after at least 188 workers tested positive for the coronavirus. This site is responsible for approximately 12% of Vale’s total production. Vale’s supply in the short-term is at risk but it’s difficult to tell whether the company’s annual production will be impacted. Broadly speaking, South America has struggled to contain the coronavirus – a near-term threat for its iron ore production and shipments.
An increasing dependency on Aussie miners to supply iron ore could be good news for the likes of Rio Tinto, Fortescue and BHP.
Chinese iron ore consumption
China has invested in its infrastructure, transport and energy sectors to claw its way back to positive growth. The construction sector is making a suggestive recovery judging by a rise in demand for cement and site machinery.
Data from the China Construction Machinery Association showed that the 25 largest excavator companies recorded sales up 60% year on year in May. Furthermore, the government announced plans to issue RMB$3.75trn worth of bonds to fund regional developments and support businesses hit by COVID-19.
Brazil’s production challenges coupled with an increase in construction activity in China could see iron ore prices remain at today’s elevated levels.
Are Rio Tinto, Fortescue and BHP a buy?
There are many near-term factors that point to higher iron ore prices. This would mean healthy margins and market-leading dividends from Aussie iron ore miners.
Fortescue, being a pure iron ore play means its share price is more responsive to rising iron ore prices. Its shares hit a record all-time high last week of $15.25 while paying a dividend yield of 7.40%. Given how much it has run-up in recent times, I would personally avoid Fortescue shares for the time being.
Alternatively, I believe the Rio Tinto and BHP share price represent good long-term value at today’s prices. Both shares are within 15% of its recent highs and pay a moderate dividend yield of around 6%.
The Rio Tinto and BHP share price appear good value at today’s prices. However, if investors aren’t interested in dividends or commodities, consider our free report below for 5 cheap shares to add to your portfolio today.
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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. 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.