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Iron ore retreats: are Fortescue, BHP and Rio Tinto a buy?

Lina Lim
mining mine equipment

China’s iron ore futures declined by 2.4% on Monday as ASX miners Rio Tinto Limited (ASX: RIO) share price fell 1.4% to $103.86, while BHP Group Ltd (ASX: BHP) share price dropped 0.35% to $40.16 and Fortescue Metals Group Limited (ASX: FMG) tumbled 3.75% to $8.47.

Iron ore prices have gone on a tear in recent months following a fatal disaster at Brazil’s Vale SA tailing dam, while big Australian miners BHP, Rio Tinto and Fortescue were affected by a tropical cyclone earlier this year.

Are ASX miners a buy?

Iron ore fundamentals are still looking very bullish as Chinese iron ore port inventories have recently hit two-and-a-half year lows and are down 20% from early March highs. Furthermore, China’s crude steel output hit a record high in May, highlighting China’s continued demand for steel consumption.

While these demand-side fundamentals are looking very strong, there are some emerging issues that need to be addressed. On Monday, the spotlight turned to top iron ore miner Vale SA. Vale expects to soon restore 20 million tonnes of yearly capacity at its Brucutu mine in Brazil. To put 20 million tonnes into perspective – Fortescue, the world’s third largest iron ore miner produced 101.1 million tonnes of iron ore in 1H19. However, Vale is still pending court approval to resume production at Brucutu.

Another concern for investors relates to the all-important consumers of iron ore – steel mills. A jump in iron ore prices chips away at profit margins for steel mills. This is a delicate scenario where China’s steel output is expected to remain strong, but high raw material costs could see slowing purchases made by steel mills that are anticipating a hit from shrinking profitability. Investors might have noticed the high price of iron ore is also affecting the likes of steel maker BlueScope Steel Limited (ASX: BSL).

Foolish takeaway

Vale production and shrinking steel mill margins are the two main factors that could result in a downturn in Iron Ore prices. However, I am confident that iron ore markets will continue to face a significant supply-demand imbalance.

Vale is still pending court approval to resume production that will not materially impact the market until much later. While China’s steel demand market remains robust while iron ore inventory continues to trend lower.

I believe the Australian mining sector still presents a worthy short-term opportunity while the commodity market continues to run hot.

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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. 2019