Most analysts believe the iron ore price is set to tumble from current levels. Should investors in ASX mining stocks be spooked?
While the price of the steel making ingredient has pulled back from its high at around US$160 a tonne, it's still within striking distance of its record at around US$150 a tonne.
There are several well-known and lesser-known factors that have pushed the commodity higher. Trade war tensions is the most recent event making the headlines, while Brazilian miner Vale SA's weak production guidance is another.
Speculators adding to the iron ore price frenzy
But that's only the tip of the iceberg. There's a range of other factors keeping the iron ore price high and ASX iron ore producers well bid.
"The rate of erosion of China's port stocks suggests the market is currently in an 80Mtpa deficit, with price $50/t above its 'normal' level vs inventory," said Morgan Stanley.
"Clearly the market is pricing in more tightness to come, with speculative inflows on the Dalian and SGX exchanges driving the price higher."
Supply side issues a tailwind for industry
The broker also noted that the cyclone season is upon us, which could disrupt supply of the mineral from Australia to China.
Supply is also at risk over the medium-term. The Rio Tinto Limited's (ASX: RIO) Juukan debacle has also perversely helped to keep the iron ore price higher.
The recommendation in front of government is likely to limit the expansion and development of new mines.
"There are about 35,000 declared Aboriginal heritage sites in Western Australia, with about 5% of all iron ore tenements covered by heritage areas," added Morgan Stanley.
"Having to avoid these sites altogether will require mine plans to be adjusted, and could sterilise some reserves."
Seasonal demand helping ASX iron ore miners
Further, the seasonal dip in demand from Chinese steel mills may not happen this year. Blast furnace utilisation is still stuck at above 90% and finished steel inventories are running down.
"Although winter has arrived in Northern China, it looks like construction firms want to make up for earlier delays during the winter months," said Morgan Stanley.
Despite these tailwinds, the broker warned that iron ore is looking overbought and its forecasting prices will fall to average US$123 a tonne in the first half of 2021.
UBS' prediction is even more dire. The broker is also warning that fundamentals cannot support the spot price and that the commodity will average US$110 a tonne next year.
Should you sell ASX iron ore stocks now?
However, before you panic sell the mining heavyweights like the Fortescue Metals Group Limited (ASX: FMG) share price and BHP Group Ltd (ASX: BHP) share price, Morgan Stanley can't see a trigger in the near-term that could send the iron ore price tumbling.
Further, analyst forecasts have notoriously underestimated the iron ore price. This highlights the fact that making forecasts can be more art than science.
And even if the iron ore price were to ease closer towards US$100, our iron ore majors will still be making very good profits, which is more than what we can say for many other sectors.
