It’s hard to think about profit upgrades when the market is tumbling, but that’s what the Rio Tinto Limited (ASX: RIO) share price and BHP Group Ltd (ASX: BHP) share price could be facing.
The post Why Rio Tinto (ASX:RIO) and BHP (ASX:BHP) look set for another profit upgrade appeared first on The Motley Fool Australia. –
Analysts are probably going to be left scrambling yet again to upgrade their price forecast for iron ore.
These forecasts are well below the iron ore spot price. For instance, Goldman Sachs pencilled in a price of US$137 a tonne by end of June, reported the Australian Financial Review.
That implies a 27% crash in the ore price in the next 10 weeks!
Market underestimating the iron ore price rally
Goldman isn’t the only one with a seemingly conservative estimate. UBS is forecasting a price of just US$100 a tonne by year end when the spot price is around US$180 a tonne.
Further, UBS expects the steel-making mineral to weaken further in 2022 to US$75 a tonne.
These price predictions are quite typical of analysts’ forecasts as they have always lagged the spot price in the last year or two.
Why RIO and BHP could be cum earnings upgrade again
Experts have underestimated the resilience of the iron ore market, and there are few signs of this market deflating.
In fact, there are probably more tailwinds than headwinds. For one, global steel prices are strong – very strong.
If iron ore customers are making a decent return, demand for the commodity will remain strong.
Better this time for RIO and BHP
Meanwhile, the demand dynamics during this commodity boom looks more enduring that the last “supercycle”.
Back in 2011, practically all the demand for iron ore was coming only from China. The Asian giant stepped up its infrastructure spending spree a decade ago to keep its economy growing through the GFC.
This time round, it isn’t only the Chinese pulling on the infrastructure building lever to get over COVID-19.
Firing on more than one cylinder
US President Joe Biden is also looking to unleash US$3 trillion ($3.9 trillion) on rebuilding his nation’s aging infrastructure.
Other countries, including the European Union, are also turning to infrastructure construction to reenergise their economies, although on a less impressive scale.
We also can’t forget that iron ore output from Brazil remains hamstrung as COVID-19 continues to ravage its economy.
The country’s output will recover at some stage, but so far, the experts have underestimated the time this will take.
In the meantime, BHP, Rio Tinto and the Fortescue Metals Group Limited (ASX: FMG) share price will be making hay while the sun shines.
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*Returns as of February 15th 2021
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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.