The price of iron ore – the raw material for steel – dropped to a two-and-a-half year low on Thursday, taking the mining shares down with it. The benchmark price for iron ore with 62% iron content fell by nearly 5% to $90.30 a tonne, its lowest level since December 2009.
Until recently, China seemed to have an almost insatiable demand for iron ore. But, as Larry Elliot wrote in today's paper:
China's economy is now slowing, and although the economic data is not particularly reliable, it seems to be slowing fast. The country has two million unsold homes, with another 30 million under construction. There is a glut of iron ore and the price is falling.
Analysts are now warning that the iron ore price could fall by another 30% over the next few months. This is all very bad news for the miners. Rio Tinto – which makes almost half of its revenues from iron ore – saw its shares drop 2.5% to £27.05. Vedanta Resources topped the loser board, down 3.2% at 861p. It was followed closely by BHP Billiton, down 2.9% at £18.48, and Kazakymys, off 2.9% at 599p.
In terms of broker research, Chris LaFemina at Jefferies switched his preference to Antofagasta over Kazakhmys on Thursday. Among other things, he said Kazakhmys's 26% stake in ENRC is "not helpful".
Unfortunately, Kaz is only receiving a small dividend from ENRC, and this stake is highly illiquid and probably impossible to monetise for now. We are concerned that this investment may continue to be a drag on Kaz as ENRC is highly exposed to steelmaking raw materials (ferroalloys and iron ore), which have been extremely weak recently and may remain weak in the near-term.
He downgraded his rating on Kazakhmys from buy to hold, with a target price of 650p, and maintained a hold rating on Antofagasta.
