You could be excused for thinking that the iron ore market is in long-term decline. But then, why are the majors pouring billions into iron ore growth projects despite a seemingly downbeat price outlook?
In late January, billionaire Andrew Forrest launched an off market bid to acquire Red Hawk, a junior which owns the Blacksmith iron ore deposit just 30 kilometres west of Fortescue's Solomon operations in the Pilbara. Rio Tinto, despite its giant Simandou project in Guinea coming online later this year, announced that it would invest $1.8 billion to develop the Brockman Syncline project in the West Pilbara. And Brazilian iron ore giant Vale announced a $12 billion investment to expand its Carajas project in northern Brazil. All of these announcements have occurred within the last few weeks. So, what’s going on?
One bright outlook is the changing dynamic of Chinese steel demand. Chinese real estate construction once contributed around half of all steel demand in China; it’s now less than a quarter. Today, machinery construction is the most critical driver of demand. This partly explains why Chinese iron ore imports reached a new record high in the second half of 2024, a fact which is lost on most iron ore bears. In their heads, Chinese real estate construction will ALWAYS be the primary driver!
Watching and waiting to see how far Donald Trump would push ahead with his tariff agenda against China made iron ore miners unanimously hit the pause button on development projects last year, but that threat is now fully baked in, and the majors are rapidly pivoting back towards long-term growth in the iron ore sector. They all have a high-level conviction that demand will remain robust which is good enough for me.
I stick with my BHP even though they have dropped yet another seventy cents today, to $38.95 (from a 52-week high of $46.41 and an all-time high of well over $50 in December 2023). And while there are no guarantees in any market and there are no signs of a bottom appearing yet, historically, in the long run shares deliver a better performance compared to other asset classes.
If Trump’s tariff hit to stocks worries you, read this poem:
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If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting ... If you can think — and not make thoughts your aim ... If you can trust yourself when all men doubt you ... Yours is the Earth and everything that’s in it.
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