In what would seem to be a counterintuitive move, Goldman Sachs has upgraded the stock of Fortescue Metals to Buy from Hold.
Iron ore price fell 22% last week as the trade war with China heated up. China is the largest steel producer in the world and likewise the largest importer of iron ore, the key raw material used in steel production. What’s more, JPMorgan analyst Dominic O’Kane pointed out in a Monday research report that iron ore miner Vale (ticker: VALE) is producing more ore and Chinese steel inventories are on the rise. Higher inventories are a signal to the market to stop producing steel.
But the iron-ore outlook is less bleak than those data points imply. “Buy-rated [ Rio Tinto (RIO)] and [ Coronado Global Resources (CRN.Australia)] have already reported above consensus [earnings before interest, taxes, depreciation and amortization, or Ebitda,] and dividend surprises,” Goldman Sachs analyst Paul Young said in a Tuesday research report. “Our commodities team has also upgraded 2019, 2020, 20201 estimated iron ore.”
In addition to raising his rating on Fortescue (FMG.Australia), Young has a 9.80 Australian dollar (US$6.70) price target for the stock, about 35% higher than recent levels.
Even though ore prices are volatile, Goldman sees slower ore production growth from BHP (BHP), Vale and Rio Tinto—the so-call iron-ore majors—as well as strong Chinese steel output.
“The froth has come out of iron ore sentiment,” O’Kane wrote about the recent price drop. That’s not a bad thing in commodity markets. Investors can get scared off when equities follow commodity price spikes too closely. He calls Rio Tinto his “top pick.”
The U.S. market is insulated from global iron-ore prices because the country is self-sufficient. Still, ore prices impact global steel prices and the U.S. is a net importer of steel. Higher ore prices should have led to higher U.S. steel prices, but weak demand and lower scrap prices have capped any steel-price gains this year.
Overall, it has been a wild ride for steel and steel raw materials in 2019. United States Steel (X) hit a new 52-week low recently, despite better than expected second-quarter earnings. Trade concerns, company capital spending plans and falling U.S. steel prices have caused investors to abandon the stock. Benchmark steel price are down about 17% year to date, but are up about 14% from July lows.
Source: Al Root |