Zacks Industry Outlook Highlights: BHP Billiton, Rio Tinto, Fortescue Metals Group and Vale

CHICAGO, Jan. 10, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Mining , including BHP Billiton Limited (NYSE: BHP-Free Report), Rio Tinto plc (NYSE: RIO-Free Report), Fortescue Metals Group Limited (OTC:FSUGY-Free Report) and Vale S.A. (NYSE: VALE-Free Report).

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Industry: Mining

Link: http://www.zacks.com/commentary/30792/mining-ferrous--non-ferrous-stock-outlook---jan-2014

The rise in global population, growth in the Chinese economy, urbanization of the Asian countries and the increasing requirements in the developed countries have created an unprecedented demand for minerals and metals. The metals & mining industry caters to this ever-rising demand through extraction (mining) and primary and secondary processing of these metals. However, of late the tepid global economic growth emerged as a major headwind for the global metal industry.

Mining - Ferrous: Iron

Iron Ore Price Trends

Iron ore prices had an overall good run in 2013, compared to other base metals. Price peaked to a high of $154 per ton in February, due to the restocking carried out by Chinese steel mills and heightened demand from steel end-consumers, particularly the Chinese construction sector.

However, prices dipped to a low of $114.8 per ton in June due to the growing apprehension over China's economic outlook. The situation soon improved as price regained ground supported by increased imports into China as Chinese infrastructure spending boosted demand, averaging $136.32 in November.

Iron Ore Industry Performance

Demand for iron ore remained relatively strong in 2013. Domestic supply in China was insufficient to meet the demand triggered by the steel industry and the housing market. Chinese imports thus rose during the year, significantly impacting the demand for the metal worldwide.

To capitalize on the rising prices and elevated demand in China, iron mining majors BHP Billiton Limited (NYSE: BHP-Free Report), Rio Tinto plc (NYSE: RIO-Free Report) and Fortescue Metals Group Limited (OTC:FSUGY-Free Report) have invested heavily in projects in the iron-ore rich Pilbara region in Western Australia to augment their annual iron ore production capacity.

Separately, Vale S.A. (NYSE: VALE-Free Report) was recently granted an environmental license for its $20 billion investment in new iron ore production capacity at its Carajas mining complex in northern Brazil. This will help Vale to scale up its iron ore production and will be the largest project in Vale's history as well as in the iron ore industry.

Iron Industry: Outlook

The major iron ore producers Rio Tinto, BHP Billiton and Fortescue Metals ramped up production in the later part of 2013, which will lead to a glut in supply in 2014. Furthermore, the world's top exporter Australia will increase its shipment as the abovementioned projects commence. Brazil and India will also hike their exports. In case this excess supply is not matched by adequate demand, it will expose the market to the risk of a decline in prices.

We believe the fate of iron ore prices now mainly hinges on Chinese demand.  The emergence of Chinese industrial demand has facilitated a paradigm shift in the iron ore market over the last two decades.

China is currently the largest producer of steel and consequently the largest consumer of iron ore, accounting for around 60% of the global seaborne market. China's economy has risen 7.8% in the third quarter of 2013 compared with 7.5% in the second quarter. Iron-ore imports rose to a record 74.6 million tons in September triggered by an increase in demand for steel.

Thus, a rebound in China's metal imports along with improvement in global manufacturing will push iron ore prices upward. Furthermore, iron ore prices will be supported by increased demand from steel markets in India, Japan and South Korea.

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