Demand for iron ore in China may have spiked earlier this month, but Swiss bank UBS says it’s a “short-lived” surge that will soon crumble. The investment bank said it believes earlier demand was partly driven by restocking ahead of a weeklong national holiday in China that begins Oct. 1, when industrial activity is expected to tumble. China is also expected to implement its “Blue Sky” policy, a pollution reduction program, from mid-October ahead of the meeting of Chinese Communist Party officials in Beijing. This means that thousands of industrial facilities and chemical plants will be temporarily closed to improve air quality in the region, further stifling demand. This is expected to come at a time when prices for iron ore, used primarily by steelmakers, are already in freefall following China’s housing crisis. UBS’s report, dated September 27, says global demand for iron ore has already weakened, with production of pig iron, an intermediate steel product, falling 7% from the month of August last year. Mining companies exposed to the commodity are likely to be affected by the upcoming shift in demand. Here’s what’s in store for the big names in the industry, according to the bank: Rio Tinto UBS has predicted that London-listed mining giant Rio Tinto is on track to ship iron ore at the bottom of its previous forecast. Rio Tinto’s exports from Western Australia are expected to fall 1% in the third quarter of this year compared to 2021, UBS said. Given that more than 60% of the company’s revenue came from the commodity, according to its 2021 results, UBS said the price of iron ore was the main driver of the stock. Although its shares have fallen more than 20% from their recent highs, UBS said there is additional downside risk. The investment bank has a price target of £43 ($46) per share for Rio, which is down 11.7% from current levels. Anglo American Anglo American’s sales from its South African mine are expected to be down 9% for the three months to September, according to research from the Swiss bank. Iron ore sales accounted for two-fifths of its revenue according to its 2021 filings, making the company dependent on good performance of the raw material. UBS has tagged Anglo American with a “sell” rating and a price target of £26 ($28.3) per share. That would be 5% below current levels. Who are the winners? Analysts expect Australian miners BHP and Fortescue Metals to see year-on-year growth in iron ore shipments from their largest mines, at 2% and 4% respectively. But because iron ore accounts for more than half of BHP’s revenue and Fortescue Metals is a single-product miner, their fortunes are closely tied to the price trajectory of the product, the investment bank said. UBS said it was “cautious” on BHP as it expects commodity prices to fall over the next two years, which will put pressure on cash flow and returns as capital expenditure will increase. “Cost control will become increasingly important to FMG if iron ore prices return as expected,” UBS said, referring to Fortescue Metals Group. BHP shares are currently trading 7.5% above its price target of A$35.50 ($23) and Fortescue Metals Group shares are 6.2% above its price target of course of 15.80 Australian dollars ($10.2).
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