The S&P/ASX 200 Index (Index:^AXJO) is set to open higher and it’s the ASX iron ore miners that are likely to lead the charge this morning.
The post Why ASX iron ore stocks are set to rally today appeared first on The Motley Fool Australia. –
ASX bulls rejoice! The market is set to open higher and it’s the ASX iron ore miners that are likely to lead the charge this morning.
The futures market is pointing to a 0.6% jump in the S&P/ASX 200 Index (Index:^AXJO) at the open as risk taking fuelled another big jump in the iron ore price.
The price of the steel making ingredient surged 5.8% to US$145.01 a tonne on Friday evening, reported the Australian Financial Review.
Why iron ore prices are surging
It isn’t only promising COVID‐19 vaccine news that’s bringing out the animal spirits for the commodity. The US federal government appears closer to unleashing a new round of economic stimulus that could be worth around US$1 trillion before year end.
Then there is the economic rebound in China, which is the largest buyer of Australian iron ore. The Asian giant is about the only major economy that can boast about a V-shaped recovery.
Rally favours smaller ASX iron ore stocks near-term
But I won’t be surprised to see the smaller marginal ASX miners benefit more. Rising commodity prices tend to favour these stocks more. These stocks include the Mount Gibson Iron Limited (ASX: MGX) share price and Deterra Royalties Ltd (ASX: DRR) share price.
On the flipside, the big run up in the iron ore price over a short timeframe is causing some to question if the rally is sustainable.
After all, what goes up quickly has a tendency to tumble suddenly.
Why the iron ore price can go higher
But the iron ore run may be more enduring than sceptics believe. Firstly, Vale SA’s production guidance downgrade for 2020 and 2021 clears the way higher for Australian producers. The Brazilian rival is struggling to restore output to pre-COVID levels because of the pandemic.
Even if a vaccine is available today, it will take considerable time for it to be available to the masses.
Meanwhile, demand for iron ore, particularly from China, is likely to increase as its economic recovery gathers pace. Also, the Chinese government needs the ore to build its military capabilities. Thank goodness it doesn’t have alternative suppliers for iron ore as Australia supplies around 60% of its market.
Other tailwinds supporting ASX iron ore stocks
Thirdly, currency forecasters are tipping further weakness in the US dollar in 2021. The massive stimulus that the US will have to undertake under new President Biden to restore growth will weaken the greenback.
A weaker US dollar usually means higher commodity prices as commodities are priced in the US currency.
Finally, history bodes well for the iron ore price. Analysts have repeatedly underestimated the strength in the commodity. There’s no reason to think the pessimists have got it right this time – at least not in the shorter-term.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
- 5 things to watch on the ASX 200 on Monday
- How to get a passive income of $50,000 per year from ASX dividend shares
- 2 ASX dividend shares with generous yields
- 5 things to watch on the ASX 200 next week
- These were the worst performing ASX 200 shares last week
The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.