Morningstar Predicts Continued Weakness in Iron Ore, Steel

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Morningstar recently published its “Outlook for Basic Materials Stocks” and the picture is still negative for base metals and mined metal inputs.

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The commentary is part of Morningstar’s Quarter-End Insights, a special report also featuring outlooks for the economy, stock market, credit market, and each sector.

  • Mined commodity prices are unlikely to recover from recent lows, as China’s structural economic transition diminishes the main source of global demand growth.
  • Falling input costs and global overcapacity have reshaped the global steel industry: Prices will be lower for longer.

Daniel Rohr, director of basic materials equity research, said that the price of iron ore is likely to remain low as is that of steel.

No Iron Ore Recovery

“The decisions by Rio Tinto Group, Vale SA, and BHP Billiton to build (new mining) projects was not predicated on forcing out smaller producers,” Rohr said. “The decisions were predicated on generating strong returns with the expectation that iron ore prices would go higher. Now that they haven’t, what happened, as a side effect, it has come about that the low prices are forcing out these smaller producers. What happened is low-cost supply hitting a market with flaccid demand.”

Steel Expansion Still Dependent on China

By virtue of where the steel production expansion currently is, mainly China, global production has actually shifted away from EAFs and to more costly production, Rohr also said.

He said that steel will likely remain low for the rest of the year as well. Morningstar is, however, recommending some gold miners. Top picks in the basic materials sector include Yamana Gold, Newcrest Mining, and Cloud Peak Energy.

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