Updated January 2023
Back in 2021, iron ore exported from all countries totalled US$217.6 billion. This went up 132.9% since 2017, when shipments of iron ore were $93.4 billion.
In Australia alone, US$116.6 billion of iron ore was exported, which equated to 53.6% of total iron ore exports worldwide and provided a major source of income for the country.
Here in Australia, we are the largest iron ore producers in the world, so you can imagine we have a variety of iron ore stock options to invest in.
The production and exporting of iron ore is one of the largest contributing factors to our economy.
In 2010, the metal outranked coal as Australia’s most valuable export by more than $4 billion, and it continues to outperform the black rock today.
Iron ore is, simply put, the foundation metal of Australia’s export industry, and it has been for the past 15–20 years. It’s arguably been the biggest driver of our mining boom.
But it is economically significant in other ways, as well. For instance, the mining of it accounts for a decent chunk of Aussie employment.
Our three big producers — Fortescue Metals Group [ASX:FMG], BHP Group [ASX:BHP], and Rio Tinto [ASX:Rio] — are still global market dominators, as well as being among the largest stocks on the ASX.
In 2020, iron ore exports were 36% of Australia’s total exports, and today, iron ore still represents a huge portion of our holistic exports.
There’s no denying it: iron ore is a crucial piece in the growth of our economy. So, as a potential investor, it’s essential to remain up to date with the goings-on of this resource.
With that in mind, let’s look at what may be in store for iron ore and how you could potentially profit from it.
Let’s start with the bad news. The future of iron ore is looking rocky.
China’s clean up
China’s government has been hell-bent on resolving its economic weaknesses. It’s concerned about its serious debt problem caused by too many insolvent operations. And the horrific amounts of air pollution in China is a notable environmental issue.
For these reasons, China has been aiming to stop illegal and inefficient domestic mining of iron ore because of its low-grade, loss-making results on their economy.
It’s also becoming stricter on excess steel-making — a sector with high demands of iron ore. Not only is it an environmentally unfriendly process, but China is sick and tired of selling steel at prices that don’t make a profit.
Many of these steel producers have been operating at a loss for years and can’t repay their debts. Chinese authorities have had enough and are clamping down!
Obviously, this means a reduction in iron-ore demand.
Adding to the pot is that Chinese property developers have been struck with a liquidity and solvency crisis caused by a stalled property market for a while now, having to deal with defaulting loan payments and protesting buyers.
While their actions may not directly affect the mining of iron ore, they will reduce China’s demand for it. And, as China is the biggest consumer of iron ore in the world, this means bad news for the resource.
Granted, there will always be a steel industry. But China wants only licensed operators producing steel. This is where the need for high-grade iron ore comes in. The low-grade stuff needs more energy to convert into steel, which means more toxic emissions — not ideal for a country wanting to minimise its pollution levels.
The Chief executive at Rio Tinto, Jean-Sebastien Jacques, states:
‘…there is no doubt that the restructuring of the [Chinese] steel industry is here to stay.
‘The push for environmental performance is there as well and therefore they will continue to reduce capacity. That doesn’t mean they will reduce production.’
But this high-grade iron ore, understandably, costs more. This means only the best of the best steel makers will survive. The ones who aren’t destroying the environment and aren’t constantly at risk of financial collapse.
In short, China wants to clean up its act…and its air.
Is it all bad for iron ore investment?
Is it all bad for iron ore investment?
China’s clean-up is undoubtedly reducing their iron ore demand. But this also means heightened demand for high-grade iron ore. And because higher quality is more expensive, it’s the legal steel producers making money at these prices.
The result is likely to be a greater import of iron ore from Australia and Brazil, with higher-grade reserves.
China is also moving from an investment-led economy — largely driven by building infrastructure that requires iron ore — to a consumer-led economy. But China is still using economic stimulus to keep the steel sector alive as it carries out this transition.
For example, China has recently approved a large steel project — the $14 billion expansion of a rail network.
After its peak in 2011 and collapse in 2015, the iron ore price had a volatile period before reaching the dizzying increase to US$200 a tonne last year.
It’s since been stabilising but remains fairly high in comparison to earlier figures.
Some analysts are saying that iron could slip to US$60 a tonne in the near future, even with its price reaching US$112 in December 2022. But not everyone agrees — there may be another rally yet.
Most of it depends on what gets broadcast — like with the situation recently in China, Chinese growth severely struck by continuing COVID lockdowns, slow property sales and the general global macro situation going on out there, it’s quite extraordinary iron value is holding up so well.
Looking outside of China, there’s no significant demand for iron ore from any other country in the world.
That might change in the medium to long term as India builds multiple smart cities and the US rebuilds its infrastructure.
However, there are still takeovers happening in the iron ore space…
Keeping a lookout for the best iron ore shares to buy
When there’s a low phase of a resources cycle, you often see a lift in merger activity as big players seek to snap up supply ahead of the upswing. We saw a perfect example of this play out when Atlas Iron got caught up amid a bidding war a few years ago.
Mineral Resources [ASX:MIN] lodged a takeover bid for Atlas Iron on 9 April 2018, valuing the company at 3.02 cents per share. Fortescue Metals Group then bought a major chunk of the company on 7 June.
By 6 August, Fortescue sold their stake after a failed bid to block Hancock Prospecting from taking over the miner. Hancock responded with a $390 million cash bid for Atlas, fully backed by its Board.
Atlas Iron has had a difficult past, given its leveraged balance sheet and high production cost. But the company has advanced despite all odds. It has optimised its iron ore production profile, which has increased cash flow and reduced balance sheet debt.
How to buy iron ore stocks?
It can very much depend on the lay of the land — and the price of the metal in the moment. When the sentiment is volatile, we suggest staying clear of the big players — such as Fortescue Metals Group, BHP, and Rio Tinto. These are very exposed to the iron ore price. Instead, you would be best considering possible takeover targets with growth potential.
Examples would include Brockman Mining [ASX:BSK], whose subsidiary Brockman Iron entered into a farm-in and joint venture agreement with Polaris (a subsidiary of Mineral Resources [ASX:MIN]) back in 2018. Polaris was then able to farm in and earn a 50% interest in the Marillana Iron Ore Project, located in Western Australia.
Yet, in more recent times, commodity prices have experienced quite a boom. This is when it’s a good time to look more closely at the bigger companies with full operations and established supply chains that can capitalise on these higher shipping prices.
With the recent rallies in iron ore, it’s a good idea to get in on some of that momentum, and iron ore is an extremely profitable source that can’t be ignored.
While producers have been comfortably making the money, some junior stocks were battered from a drop a few months ago.
Yet, as margins inflate, costs are declining, especially as diesel prices re-enter more manageable rates.
So, aside from the big players — which can be a little pricey if you’re new to the books — you could look into these: Grange Resources [ASX:GRR], Fenix Resources [ASX:FEX], and Mt Gibson Iron [ASX:MGX].
Grange Resources (market cap $983.74 million) owns and operates one of Australia’s largest integrated iron ore mining and pellet productions in Tasmania, where it aims to produce high-quality, steel-making raw materials. The miner claims its operations will be ‘efficient, flexible, and stakeholder focused.’
By mid-December 2022, Grange’s share price had moved up 27% in the year. It holds operations in the Savage River, Port Latta (which produces more than 2.2 million tonnes of iron ore products annually) and Southdown, a 70%-owned joint venture with SRT, which produces 1.2 billion tonnes of mineral resources, including ore reserves of 388 metric tonnes.
Fenix Resources (market cap $141.55 million) is a high-grade, high-margin iron ore producer located in the mid-west mining region of Western Australia.
The company’s 100% owned flagship Iron Ridge project has been established approximately 600km north-northeast of Perth, WA, and is connected by a sealed RAV-rated road to the port of Geraldton, enabling smooth export.
Since producing its first ore in December 2020, Fenix has now crushed and shipped more than 1.3Mt of high-grade iron ore.
Lastly, we have Mt Gibson Iron, an independent Australian producer of high-quality direct shipping grade iron ore products with a market cap of $625.43 million. This company is situated in the Kimberley and mid-west regions of Western Australia.
While also possessing operating bulk commodity export facilities at Geraldton Port, this company has depleted a handful of mines and is now focusing most prominently on its flagship Koolan Island mine, which exported an excess of 30Mt of ore from Koolan Island in December 2021.
The above are not formal recommendations but ideas to get you started. Stocks like these are worth considering, but make sure you do your own investigations first.
Mining stocks can be high risk, so never invest more than you are prepared to lose.
We’ll keep you updated on all the latest on iron ore and Australia’s exports here in Fat Tail Daily.
