Iron Ore Surges: Should You Buy BHP, RIO & FMG?

In the last year, there has been strong demand from China for Australian iron ore, resulting in iron ore prices surging from around $90 to a high of $218, which has also translated into strong rises for our Australian miners. The biggest gain this calendar year is Grange Resources, which is up 75.58 per cent followed by Champion Resources up 45 per cent, while BHP, which is our largest miner, has risen just 13.79 per cent.

RIO has also risen 8.28 per cent while Fortescue Metals has performed poorly falling 4.72 per cent this calendar year. So, will our biggest miners play catch up on their smaller counterparts?

Is now the time to buy BHP, RIO and FMG?

While China has imposed tariffs on other imports from Australia, it has stayed clear of iron ore, which indicates how important this commodity is to China and the growth of their economy in the future. Given the billions our government rakes in from the sale of iron ore to China, no doubt they would not want China’s demand for this commodity to slow, particularly given our ever increasing account deficit.

That said, the price of iron ore has fallen in the last week, as the Chinese government seeks to strengthen its supply management in order to control demand from Chinese steel manufacturers and, as such, I expect to see continued short-term weakness in iron ore prices.

This will also translate into a pullback on the price of our mining stocks with BHP, RIO and Fortescue likely to fall together with some of the other miners. I anticipate that BHP and RIO will fall in the vicinity of 10 to 20 per cent while Fortescue will likely suffer a larger fall. Following this, I believe these stocks will become great buying opportunities.

What were the best and worst performing sectors last week?

The worst performer over the past few weeks has finally turned around to be the best performer this week with Information Technology up 5.97 per cent followed by Healthcare up 1.58 per cent and Consumer Staples up 1.41 per cent. The worst performing sectors included Utilities down 2.33 per cent, while Materials and Energy were both down 2.16 per cent for the week.

The best performers in the ASX/S&P top 100 stocks include Appen, which after falling over 60 per cent since last October rose 19.36 per cent last week. But before you get too excited and suffer a fear of missing out on the run, last week’s rise in Appen is far from confirmation that the down move on this stock is over. Xero also rose strongly last week up 13.07 per and Altium rose 11.47 per cent. The worst performing stocks included Bluescope Steel Ltd down 6.56 per cent followed by Santos down 5.71 per cent and Alumina down 5.25 per cent.

What's next for the Australian share market?

Once again, last week the Australian stock market rose early only to fall heavily mid-week to its lowest level in six weeks, which indicates that the bearish sentiment we have been experiencing in recent weeks is still present. Despite the market rising around 1.40 per cent in the last two days of last week, Friday’s close was far from strong.

My expectation is that the All Ordinaries Index will continue to fall away over the coming weeks to 6,600 points and possibly lower. That said, given the way our market has been unfolding over the last 12 months, it could just as easily trade sideways for weeks, therefore, we need to be prepared for anything to occur.

In my previous report, I mentioned that the WAAAX stocks had suffered significant declines in the prior week but some have now traded up strongly this week although I caution investors jumping in believing they will get a bargain right now, as you may end up catching a falling knife.

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.