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Why the outlook for BHP and Rio Tinto suddenly turned brighter today

Brendon Lau
Resources shares

Iron ore and steel stocks are on the nose and are responsible for dragging down the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index on Friday.

This is despite the fact that the world’s largest steel maker ArcelorMittal provided a stronger than expected outlook for the industry.

Many may have missed the good news as ArcelorMittal doesn’t trade on the ASX. Worries about the economic impact from the coronavirus is making a comeback instead.

Resource stocks under pressure

The BHP Group Ltd (ASX: BHP) share price fell 1.7% to $38.87, the Rio Tinto Limited (ASX: RIO) share price eased 0.7% to $98.43 and the BlueScope Steel Limited (ASX: BSL) share price tumbled 2.4% to $14.01 in after lunch trade.

But unless the coronavirus outbreak cripples the global economy for much longer than expected, the outlook for the steel industry could be better than what many fear.

Steel outlook improves for 2020

ArcelorMittal is forecasting increased demand for steel and noted that the challenging conditions buffeting the industry are easing, according to Reuters. Shares in the Luxembourg-based group jumped 11% on the news.

Management believes that destocking was responsible for at least half of the drop in demand for steel from its three key markets last year. Destocking refers to customers using their existing inventory instead of buying new material.

This resulted in low stock levels and customers are forced to replenish depleted supplies. This bodes well for steel and iron ore prices.

China growth

What’s more significant for ASX investors is that ArcelorMittal sees overall steel demand growing by 1% in China despite the SARS-like epidemic.

This is because the company believes demand will rebound in the second quarter of 2020 as authorities get the virus under control.

The 1% may not sound like much, but it will still give investors reason to cheer as some analysts are expecting further pain due to waning demand.

ArcelorMittal’s main markets are North America and Europe but it has a joint venture in China.

Foolish takeaway

Iron ore is the primary input to make steel and is Australia’s largest export. China buys nearly all of our iron ore output.  

If ArcelorMittal’s positive take on steel demand comes to pass, our steel and iron ore stocks could be poised to outperform in 2020.

Further, I am expecting good results from our major miners for the upcoming reporting season. These cashed-up companies may even undertake a capital return or two in the near-term.

There aren’t many other sectors on the ASX that can do that.

The post Why the outlook for BHP and Rio Tinto suddenly turned brighter today appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, BlueScope Steel 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. 2020