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Is iron ore heading to US$120 per tonne in two months?

Brendon Lau
share price boom

The Rio Tinto Limited (ASX: RIO) share price and BHP Group Ltd (ASX: BHP) share price are among the strong performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index today as the price of iron ore jumped on signs of tightening supply for the commodity.

The RIO and BHP share prices have gained over 1% and the Fortescue Metals Group Limited (ASX: FMG) share price has added close to 2% in morning trade as iron ore prices added 1.5% to US$99.26 a tonne – or up 53% over the year.

The iron ore party could be just getting started as at least one analyst forecasting the steel-making raw material will surge to US$120 a tonne in about two months, according to a report in Reuters.

Why iron ore is defying the trade war gloom

It seems investors don’t need to worry about the threat of a full-blown trade war between the US and China – at least not for the moment.

Falling iron ore inventories have been credited for the bullish outlook for the commodity with Reuters reporting that ore inventory held at Chinese ports have steadily been falling over the past four weeks from 150 million tonnes to a more than two-year low of 121.6 million.

A big drop in shipments from major Brazilian producer Vale S.A. following its tragic tailings dam disaster and the recent supply disruption from Australia due to hurricane have contributed to dwindling inventory, although it’s only half the story.

Demand for the material is starting to accelerate against the backdrop of the supply crunch, noted Singapore-based data analytics company, Tivlon Technologies.

Tivlon is bullish on the near-term outlook for iron ore due to China’s infrastructure construction boom and believes the benchmark price for 62% iron ore grade will hit US$120 per tonne by August.

Big upgrades for the sector

I don’t think that’s the consensus view but it will represent cream on the cake for our ASX-listed iron ore majors.

To be clear, the sector doesn’t need iron ore prices to move much higher. The stocks are already in “cum-upgrade” mode as mining analysts are assuming a materially lower average price for the ore for 2019/20.

Iron ore only needs to hold around the US$100 per tonne level to trigger big upgrades in the share price targets for these stocks, although shareholders like myself would not be complaining if the price gains another 20% from here.

The big question mark is the trade war and its impact on global growth. But I believe iron ore is less exposed to international trade than other commodities like copper, so I think staying overweight on the likes of Rio Tinto is not such a bad idea during these volatile times.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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. 2019