Iron Ore Prices Rebound Strongly as Restrictions Ease

Following China’s announcement earlier this year that it would cut back steel production, the price of iron ore fell by more than 50 per cent. As a result of the weakness in iron ore prices, BHP fell 34 per cent, RIO fell 36 per cent, while Fortescue Metals fell 47 per cent although this has now changed given that China recently announced it would ease restrictions on steel manufacturing. Consequently, there has been a resurgence in the price of iron ore, as it rose more than 12 per cent over the last two weeks.

BHP, RIO and FMG likely to rise strongly in 2022

BHP moved higher on the news and last week closed up 5.78 per cent and over 13 per cent since its low in early November. Interestingly, Fortescue Metals was marginally down last week, however, it has risen over 23 per cent since early November, while RIO was up slightly last week closing 1.12 per cent up and is up over 7 per cent since early November. That said, all three stocks were rising well before the news that restrictions would ease, so it demonstrates that while we would like to think the market is efficient and everything is always known, in reality, it is not black and white.

While it’s great news that BHP, RIO and FMG have performed better over the last month and may continue to do well into 2022 if China does ease restrictions on steel production, caution still needs to be exercised as nothing is guaranteed.

We need to remember the world is still working out what impact the new COVID variant Omicron will have on our economies. If there are little to no mass lockdowns around the world and China does ease restrictions, then all three of these stocks will do very well in 2022. My pick is BHP followed by RIO although I would issue a word of caution on Fortescue Metals, as it can move fast in both directions.

What were the best and worst performing sectors last week?

The best performing sectors included Materials up 1.26 per cent week followed by Financials up 0.59 per cent and Communication Services down 0.12 per cent. The worst performing sectors included Healthcare down 3.23 per cent followed by Information Technology down 2.50 per cent and Consumer Staples down 2.82 per cent.

The best performers in the S&P/ASX top 100 stocks included Worley up 9.95 per cent followed by Lynas Rare Earths up 9.35 per cent while BHP, AGL and ALS were all up over 5 per cent. The worst performing stocks included Afterpay down 9.95 per cent followed by Northern Star Resources down 9.92 per cent and IPD Education down 8.92 per cent.

What's next for the Australian share market?

The most recent all-time high on the All Ordinaries Index occurred on 13 August when it hit 7,902 points. In the 80 trading days since then, the market has exhibited indecision interspersed with periods swinging between bullish and bearish with the bears slightly more dominant, as the market is currently down around 4.5 per cent since the high.

While the market has fallen by nearly 6 per cent since the high in August, it also turned bullish rising nearly 5 per cent but is now in danger of further falls. If the Australian stock market continues to fall next week below the low of 7,446 points that occurred on 29 September, I expect it will continue to fall into January. That said, a fall to between 7,000 and 7,200 points is a good thing, as it means the market will be in a better position to rise strongly in 2022.

Right now, it would pay to err on the side of caution before buying any stocks, and above all do not dollar cost average as so many have attempted to do over these past few weeks only to lose more. Now is the time for restraint and patience.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.