Any investor who ignored the bearish calls on the iron ore sector would have doubled their money this year just by betting on the shares of the world’s fourth-biggest exporter, Fortescue Metal Group.
The gains have been driven by an unexpected price rebound amid rising steel exports and government stimulus in China. The Bloomberg Intelligence Index of 27 producers has surged 56% this year, beating a 3% gain in the MSCI World Index, while ore futures in Singapore have posted a 42% jump.
“Irrespective of where the market goes we are continuing to make strong margins,” Fortescue’s chief executive officer Nev Power said in an interview last month with Bloomberg TV. The company, which has jumped 139% this year, will report this month that its full-year profit margin rose to 42%, according to UBS Group.
Three of the world’s four largest producers are scheduled to report results in August, after Brazil’s Vale last month posted second-quarter earnings that beat analysts’ estimates. The number one shipper has gained 46% this year. The largest US. producer, Cliffs Natural Resources, is the biggest gainer in Bloomberg Intelligence’s index and has advanced almost four-fold as it swung to profit in the second quarter.
Iron ore posted back-to-back quarterly increases this year for the first time since 2013, touching $70.46 a metric ton in April, the highest since January 2015, and outpacing advances by gold and nickel. The steelmaking ingredient is being supported by increased demand in China, driven by the infrastructure and property sectors, as well as the country’s strong steel exports, according to Fortescue.
“At the start of the year the absolute worst case scenarios were being priced in,” Evan Lucas, a Melbourne-based market strategist at IG said by phone. “There have been a number of large sell calls on iron ore that have been quite badly wrong.”
The price trajectory has defied even some of the biggest producers’ expectations with BHP Billiton and Rio Tinto Group predicting in April the rally would fizzle out as rising supply swamped demand. Goldman Sachs Group raised its short-term forecasts in May and then again last week after earlier warning that iron ore would retreat to $35 a ton by year-end on oversupply and slowing steel demand growth. Citigroupalso lifted its forecasts in June.
Expectations on earnings have been revised upward due to iron ore’s rally, even though they remain a long way from the height of China’s demand boom, when BHP racked up record profits of $23.6 billion in fiscal 2011.
Fortescue’s full-year profit is forecast to rise more than 150% to $795.8 million in the 12 months ended June 30 from a year earlier, according to the average of 17 analysts’ estimates compiled by Bloomberg. In January, the average forecast was for $347 million. The producer reports August 22.
“We should see better results” this month from iron ore miners, said Matthew Keane, an analyst with Argonaut Securities, from Perth. “They have all had pretty substantial wins in terms of the cash costs. With lower costs and better iron ore prices, they are obviously going to expand margins.”
With help from iron ore, its biggest earning unit, third-biggest exporter BHP will see underlying earnings in the June half jump by 88%, compared with the previous six months, according to the average of three analysts’ estimates compiled by Bloomberg.
Rio, the second-largest supplier, is forecast to book a drop in full-year underlying earnings to $3.3 billion in 2016, although this is up from an estimate of $2.5 billion in April, according to data compiled by Bloomberg. London-based Rio is scheduled to report earnings in the six months through June on Wednesday.
Revisions to the forecasts “have clearly demonstrated that the market was underestimating commodity prices” earlier this year, Sydney-based UBS Group analyst Glyn Lawcock said by phone. In a July 27 note, Goldman said investors had been confused this year by the apparent contradiction between rising iron ore inventories and “resilient” cash prices.
An earnings reprieve risks complacency from producers on efforts to reduce costs and strengthen balance sheets, said Paul Mitchell, consulting firm Ernst & Young’s Sydney-based global mining and metals advisory leader. “The worry you’d have is that people say we’re over the worst and we can take the pressure off a little bit,” he said.
While the median forecast for 2017 among 12 analysts’ estimates compiled by Bloomberg is for iron ore to slip to average $45 a ton, Sanford C. Bernstein & Co. said in a report dated July 27 that prices may find support over the next 12 months as expanded credit in China helps to underpin steel production.
“The negative view, on what the iron price was going to do, overshot the mark,” said Jim Beyer, CEO of Perth-based Mount Gibson Iron, which has advanced 67% this year. And it’s likely that forecasts of prices headed much lower in the longer-term will also be proven wrong, according to Beyer. “The downward trend has broken” and there’s a strong case ore will continue to trade around its current range, he said.
© 2016 Bloomberg