UBS noted that the price of iron ore has increased week on week to around $118 per tonne. This upward move comes despite indicators pointing to weakness in market fundamentals. Iron ore port stocks have remained largely flat, deviating from usual seasonal trends.
The expected seasonal increase in demand is described as modest, which is reflected in the China Iron and Steel Association (CISA) pig iron production figures for the first ten days of April and MySteel’s blast furnace utilization rates.
The supply of iron ore, on the other hand, is increasing. Shipments from traditional markets are up 4% this year. This increase includes a notable performance from Brazil. While raw material costs have fallen, steel margins have improved, albeit against a backdrop of lower steel prices. Meanwhile, net exports of finished steel from China reached record highs in March.
The market’s reaction to these mixed signals includes a small net long position on the Dalian Commodity Exchange. Despite the price increase and differing market signals, UBS maintains a neutral stance on major mining companies such as Rio Tinto (NYSE:), BHP Group (NYSE:) and Vale.
UBS estimates that the spot free cash flow (FCF) yield for BHP is around 8%, while Rio Tinto and Vale’s yields are around 10% and 14% respectively. These figures are part of UBS’s interactive model assessments for the companies.
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