Analysts at the investment bank say iron ore is likely to drop below US$100 within a year and have hit Australian miners with rating downgrades.
Analysts at the investment bank say iron ore is likely to drop below US$100 within a year and have hit Australian miners with rating downgrades.

UBS forecasts iron ore price drop

UBS has slashed its share target price for Rio Tinto and downgraded its recommendations for BHP and Fortescue Metals Group, as analysts at the investment bank turn bearish on iron ore, saying the commodity is reaching an "inflection point" and at risk of falling sharply in price over the next year.

In research notes published over the Easter holiday period, UBS analysts said the forces underpinning a near 100 per cent annual increase in the iron ore price to US$160-US$170 ($210-$223), which sent the share price of the three miners surging to record highs earlier this year, would soon be counteracted by an increase in global supply.

"We expect the iron ore supply to lift in 2H21 and demand to moderate, resulting in iron ore prices falling below US$100 per tonne in the fourth quarter," the analysts said, noting the world's second largest iron miner Vale was ramping up production at its mines in South America.

"We estimate iron ore shipments from Brazil are up 17 per cent year to date, with Vale up 14 per cent and tracking to deliver above the top end of its guidance for 2021."

Working in tandem with increasing ore supply will be a flattening of demand from China - which purchases around 80 per cent of Australian iron ore - as inventories at its ports grow and environmental regulation is increased, impacting steel production.

"Over the last few weeks we have seen iron ore inventories at Chinese ports as well as China trader and mill steel inventories lift above the normal seasonal trend," the analysts said.

"Overall inventories are not yet a concern but it appears the tightness in the market is easing."

This market dynamic will send Rio Tinto's EBITDA growth from 16 per cent in 2021 to around 5 per cent over the following two years, the analysts said, reaffirming their neutral rating for the stock and downgrading their price target to $104 per share from $126 per share.

Rio Tinto last traded on the ASX at $112 per share.

BHP and pure-play iron ore miner Fortescue Metals Group were also downgraded from buy to neutral, with Fortescue's price target reduced from $25 to $18 given its heightened exposure to the resource.

"The outlook for Fortescue is dependent on the outlook for the iron ore price, as well as the urbanisation and income growth in China (its customer)," the analysts said.

"We expect the iron ore price to trade down over the 12 months as the market moves into surplus which will cap share price performance."

BHP last traded at $45.65 per share while shares in Fortescue Metals Group last traded at $20.25.

 

Originally published as UBS forecasts iron ore price drop



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