Australia is the largest producer of iron ore in the world. According to estimates, Australia has 30% of the estimated 170 billion tonnes of iron ore in the world. The commodity generates over $100 billion in export revenues, and it is the only commodity to crack the $100 billion club. This is due to the soaring iron ore prices.
Iron ore prices stayed resilient during the pandemic and have now surged off late. There have been 2 key incidents to trigger this. China is the larger consumer of iron ore. They import 70% of all the iron ore produced in the world. The other big importers are Japan and South Korea. March onwards, China’s economic activity began to recover, and iron ore did not see too much of a drop off in demand. Coming to the supply, Australia and Brazil are the biggest exporters of the commodity. With Brazil still affected by the pandemic, it has led to temporary suspension of mining operations – causing a shortage of supply. The decrease in supply, an increase in demand, and a weaker US dollar has led to higher iron ore prices.
On the 16th of February 2021, at the time of this blog, iron ore price has been hovering around US$159.7/tonne. With the soaring prices and Australia being the largest exporter of the commodity, the performance of the Australian dollar is closely linked to the performance of the commodity. The Australian economy in 2021, a time when it is recovering from the pandemic, the iron ore industry is of extreme importance, more so than ever before.
Fortescue Metals Group is one of the largest iron ore producers in the world and it has performed exceptionally well during a very turbulent 2020. FMG has returned over 100% in the past year, with significant gains in the past 6 months. High iron ore prices and a halt in operations to one of its biggest competitors has resulted in an exceptional share price performance. They are also one of the top dividend stocks listed on the ASX with current annual yields coming in over 7%. FMG is arguably the best pure play iron ore stock on the ASX.
BHP needs no introduction to Australian investors. It is arguably the most well diversified mining stock there is on the ASX. BHP derives revenues from 4 main commodities – Iron Ore, Copper, Coal, and Petroleum. These commodities are very sensitive to the global economic outlook and activity. BHP has a market cap of $231 billion and a high dividend yield of 4.48%. The company’s revenues and margins is sure to have been boosted by not just iron ore, but also the copper and petroleum prices that have surged in recent times. The stability and diversified nature of BHP makes it an ideal stock to own when looking for exposure to iron ore stocks.
Another big dog in the commodities space is Rio Tinto. The company is dual listed – on the ASX and LSE. On the ASX, Rio Tinto has a market capitalization of $193 billion and the stock has returned over 25% in the past year. Along with iron ore, Rio also engages in the exploration and mining of other commodities such as copper, aluminum, diamonds, energy commodities etc. This is again, a very well diversified business that is relatively less risky than the market. The 5-year beta of Rio is 0.6. In FY2020, Rio reported $43 billion in revenues – a growth in the second half pushing revenues up. This was largely due to the higher commodity prices during the second half of 2020. Rio also pays a fully franked dividend with a current yield of 4.82%. It is a very good option to consider when looking for iron ore stocks on the ASX given its low risk and guaranteed returns as far as dividends go.
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