Fortescue shares slump on uncertain iron ore outlook
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The news: Shares in Fortescue Metals plunged at market open on the ASX following concerns over fading iron ore demand in China.
The numbers: Fortescue shares were down 8.7% to $16.16 by 11am AEST, making it the worst performing stock across the ASX 200. The stock was also trading ex-dividend today.
The context: The fall comes after China's iron ore futures suffered their worst one-day price drop for almost two years on Monday, according to Reuters.
New data indicated that the world's biggest buyer of seaborne iron ore is struggling revive its economy, with the Caixin purchasing managers' index (PMI) showing that new exports orders fell for the first time in eight months, and the official PMI falling for a sixth consecutive month.
Following a webcast with S&P Global, Morgan Stanley analysts said steel mill margins are expected to remain under pressure in 2024 but could be supported in the first quarter of the 2025 calendar year if there are output cuts. S&P views mill margins as the key driver of steel output over the rest of the year, rather than government policy or weather conditions.
Meanwhile, S&P expects China steel consumption to decline 1.8% in CY24, driven by lower property demand, partially offset by higher demand from the infrastructure, machinery and auto sectors.
Citi analysts noted that there remains uncertainty around long-term iron ore demand, with expected decline in China steel consumption. They flagged that while demand in India is growing, it is likely to remain a net exporter of iron ore in the next five years.
Citi remains 'buy' rated on BHP, which lowered 2% at market open, preferred over 'neutral' rated Rio Tinto (-2.6%) and 'neutral' Fortescue.
What they said: "Although there is near-term iron cost curve support, we see longer-term downside risk as the curve can reshape considerably on materially lower China demand," Citi's analysts said.
The sources: Citi research, Morgan Stanley research, Reuters
