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Resilient Chinese Steel Industry Holds Promise for Iron Ore

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Per the latest data, the Chinese steel industry has been resilient despite a slowing economy and the prolonged trade war with the United States. The country’s steel demand is expected to rise 2% in 2020. This helped lift prices of iron ore — the main steel making commodity. Notably, China, which produces about half of the world’s steel, imports more than 70% of the world’s seaborne iron ore. Further, concerns about supply crunch due to tropical cyclone Claudia in Western Australia is aiding iron ore prices.

China Steel Industry Holds Ground

China has produced 996.34 million tons (Mt) of crude steel in 2019, just shy of the 1 billion mark, per the National Bureau of Statistics of China. The figure also marked an improvement of 8.3% over 2018 and displayed acceleration from 2018’s growth rate of 6.6%. Moreover, a rise of 11.3% was noted in output for December to 84.27 million ton.

Per the China Iron & Steel Association, total steel consumption in China rose 6% to 875.3 Mt in 2019. This was spurred by demand in infrastructure building, real estate and other downstream industries. The Association remains optimistic that the country’s steel demand will climb a further 2% to reach 890 million metric tons in 2020.

The Chinese steel industry seems to have held its ground last year despite the world’s second-largest economy coming under pressure from slowing domestic growth and the trade war. The Chinese economy advanced 6.1% in 2019 — the slowest pace in 29 years but came within the government's target of 6-6.5%. The International Monetary Fund predicts China’s economy to grow by 6% in 2020, up from its previous projection of 5.8%, following the tariff reductions included in the phase one trade deal with the United States.

The construction sector continued to support domestic demand for steel. Moreover, restrictions on production to curb pollution were not as tough as previously anticipated on the steel industry.

Steel demand from the construction and home appliance industries is expected to remain strong in 2020. However, automobile, ship-building, container-manufacturing and machinery sectors are anticipated to see negative growth in 2020.

China, which makes about half of the world’s steel, imports more than 70% of the world’s seaborne iron ore. Data from the General Administration of Customs shows that China has imported 1.069 billion tons of iron ore in 2019, close to the 2017 record of 1.075 billion tons. In December, the country imported 101.3 million tons of the steel making ingredient — the highest monthly import level in 27 months.

These upbeat numbers provided a lift to iron ore prices. The price of the steel-making commodity is currently trending at $96.5 per ton, clocking a gain of 4.89% so far this year and 29% in a year’s time.

Iron ore prices had peaked to five-year highs to $125.77 in July 2019, triggered by fears of supply disruptions, following the fatal disaster at Vale S.A’s VALE Brumadinho dam rupture at Córrego do Feijão mine in Brazil. However, it had since faded amid signs of recovery in Brazilian supply and concerns regarding the U.S.-China trade war. Iron ore prices are likely to remain above $90 a ton on fears of cyclone-related disruptions in Western Australia and demand from China. In the long run, growth in world steel production spurred by urbanization will fuel the demand for iron ore and help sustain prices.

The Zacks Mining – Iron industry has gained 17.7% over the past three months, outperforming the S&P 500‘s and the Basic Materials Sector’s growth of 11.5% and 10.1%, respectively.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining- Iron Industry, currently carries a Zacks Industry Rank #7, which places it at the top 3% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Going by the EV/EBITDA multiple (a preferred valuation metric for mining companies that have high capital expenditures), the iron mining industry has a trailing 12-month EV/EBITDA multiple of 4.78, much lower than the S&P 500’s EV/EBITDA multiple of 12.38 and the sector’s 9.67.

Thus, it would be a good time to invest in the industry. We suggest stocks like Fortescue Metals Group Ltd. FSUGY and BHP Group (BHP - Free Report) , which sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Vale and Rio Tinto plc RIO carrying a Zacks Rank #3 (Hold) are also good bets. All these stocks have positive growth expectations for fiscal 2020.

Shares of Fortescue Metals Group, Vale, Rio Tinto and BHP Group gained 34.9%, 17.8%, 16.3% 16.2%, respectively, over the past three months.

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