The top three Australia-based mining companies were headed for a huge loss of as much as $11.12 billion in total market value.
What is Happening With Commodity Stocks?
A sharp pullback in commodity stocks is due to weakening China demand and concerns over a potential global recession.
Shares of Rio Tinto (ASX: RIO) on the Australian Securities Exchange (ASX) were on track to lose almost A$2 billion in market value, while BHP (ASX: BHP) and Fortescue Metals (ASX: FMG) were set to shed around A$10 billion and A$4 billion, respectively.
The drawdown comes as weaker output from Chinese steel mills hurt demand for iron ore, while commodity prices have declined due to fears that the latest interest rate hikes by global central banks could push the economy into a recession.
Rio Tinto, BHP, and Fortescue Metals have lost a total of A$30 billion since the start of June, and are set to see a third consecutive week of losses after falling to multi-week lows on Monday.
“Are we doomed? Or is it darkest before dawn?,” said analysts at the investment banking company Jefferies analysts, referring to the recent economic activity, record-high inflation, and aggressive rate hikes by the Federal Reserve and other central banks.
The analysts appeared to lean more towards the latter, being optimistic that the miners will lead the rebound after the drawdown in commodity prices and believing that the global economy will recover rather than fall into a recession.
JP Morgan analysts shared similar optimism, saying that the sector is facing certain risks but said the new monetary policy changes and easing coronavirus lockdown measures in China would lead to recovery in the second half of the year.
The bank reiterated its “neutral” rating on shares of Rio Tinto and BHP.
Iron Ore Prices Slump
Iron ore spot prices have been battered in the recent period due to investors’ fears over China’s economic health and long-term market risks as Bejing looks to cut costs permanently.
The iron ore 62% for delivery to China slipped to $121.95 a tonne on June 17, its lowest point since January 1, and down 24% from its high in 2022 it hit in March. Domestic iron ore contract in China also declined to 838 yuan ($124.7) at the end of the last week, down more than 10% from its highest point this year of 934 yuan.
Furthermore, weaker profit margins at China-based steel mills due to gloomy demand have accelerated the decline in iron ore prices over the recent weeks.
Multiple steel mills in China are reportedly set to reduce output, with some analysts predicting that steel inventory increased by 316,700 tonnes last week to 22.2 million tonnes.
China accounts for roughly 70% of global seaborne iron ore volumes, which means that any risks related to steel demand would directly affect iron ore prices. Additionally, Beijing’s commitment to a zero-COVID policy and concerns over further coronavirus lockdowns in the country are also weighing on China’s economy.
Thus, worries about the world’s second-largest economy currently overshadow expectations that the Chinese government’s stimulus measures would heal its economy in the second half of 2022.
In the end, prospects for spot iron ore prices for the remained of the year depend heavily on how successfully will Bejing curb the spread of COVID-19 and how effectively will its revitalization measures help steel-dependent activities including infrastructure construction, auto manufacturing, and housing.
Finally, iron ore prices may also face the effects of a potential revamp of the spot pricing system.
Summary
Commodity prices have plunged recently amid fears of global recession and weakening demand from China due to Covid lockdowns. As a result, mining stocks have been battered with some analysts calling for a sharp rebound in the second half of the year.
