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Are BHP, Rio Tinto and Fortescue shares a buy after a ripper 2019?

Lina Lim
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Iron ore miners BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) have had a bumper year following the surge in iron ore spot prices. While some investors may have been able to capitalise on their share price run, can the ASX iron ore miners continue to outperform the ASX 200, or will market headwinds curb any further upside?

A miner’s respective output and operational performance is important, but the share price is largely driven by the iron ore spot price. There are factors in play that can continue to buoy the iron ore price in the short term, but the general consensus is that prices will head south in the coming years.

Here’s a closer look at what could impact the iron ore sector in 2020.

Chinese infrastructure investment 

There is a lot of speculation around China’s infrastructure investment that may continue to elevate iron ore prices. Beijing has already declared 800 billion yuan (US$115 billion) in railway investment, 1.8 trillion yuan in highway and waterway investment and 90 billion yuan in civil aviation investment in 2020. The focus to re-boot its slowing economy could have positive implications for iron ore markets.

Will Vale come online? 

The world’s largest iron ore miner, Vale SA, has been the driving reason behind the surge in iron ore prices in 2019. However, Vale has announced that it is looking at boosting production by around 15 million tonnes in 2020 and by a further 25 million tonnes in 2021. Its CEO Fabio Schvartsman has said that the company sees prices easing back to US$60–80 range and that such prices would represent ‘a comfortable band’ for the company. While Australian miners would still be able to maintain healthy margins are those prices, it would result in much lower earnings and cash flows.

Vale said that it is aiming to return to its 2018 levels of around 400 million tonnes by 2023. Its total exports in 2019 of ore and pellets look to be around 320 million tonnes, and the company has indicated that continuing hiccups at some mine sites in the past couple of months was slowing down the build-up in capacity.

Foolish takeaway

The general consensus is that the weakening US dollar is creating tailwinds for commodity markets. There is by all means more upside to iron ore, however, increased Vale production is looming and US–Iran tensions make it increasingly difficult to enter the ASX miners at this point in time. I would personally wait for the US–Iran tensions to subside before investing in any commodity play that isn’t gold or oil.

The post Are BHP, Rio Tinto and Fortescue shares a buy after a ripper 2019? appeared first on Motley Fool Australia.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020