Falling iron ore makes stock less attractive? – Money Times

Vale shares ended another trading session down (Image: REUTERS/Yusuf Ahmad)

The downward pressure on the prices of iron ore in recent days is affecting the performance of the shares of mining companies Brazilians, including OK (VALE3).

The most traded iron ore contract on the Dalian Exchange, for September delivery, plunged 11% on Monday (20), at 746 yuan (or $111.60) a tonne, extending the 6% loss on Friday (17).

On the Singapore Stock Exchange, the July contract for the steel ingredient dropped 8% today, to US$ 110.40 a ton.

Reflecting the commodity’s decline, Vale’s shares traded in the red. The mining company fell 2.47% on the stock exchange, quoted at R$75.50. The new drop comes after the devaluation of more than 5% last Friday.

Other companies in the sector followed the same negative trajectory. CSN (CSNA3) and the controlled CSN Mining (CMIN3) lost 1% and 3.98%, respectively, while Usiminas (USIM5) and Gerdau (GGBR4) marked gains of 2.74% and 0.17%.

Understanding ore fall

The main reason for the fall in iron ore is the Chinawhich still tries to contain the Covid-19 outbreaks in the country. The imposition of the “Covid Zero” policy has placed several districts under lockdownraising uncertainties about the normalization of Chinese activity in the near future.

According to Ilan Arbetman, analyst at Activate Investmentsthe evolution of coronavirus in the Asian country is not new in itself.

“This point has been a focal point in discussions regarding commodity expectations since mid-2020”, he highlights.

What has made investors even more fearful is the posture that the Chinese government can adopt to follow its Covid Zero policy – ​​that is, the new measures that can be taken to have greater control over the spread of the virus.

You lockdowns put into question the growth expectations of the world’s second largest economic power. The restrictions in China’s main cities affected several chains in the country, especially the industry, which is not running at full capacity.

As a result, there is growing concern about a potential collapse in consumption of steel in the Chinese market, given that the recovery in demand (the civil construction sector continues to struggle) is not keeping up with supply.

In addition to China, another factor that has pushed commodities down is the growing inflation in the United States.

Charo Alves, variable income specialist at Value Investmentspoints to US inflationary pressure as the main factor behind the drop in iron ore in recent days.

After the release of data from inflation from the US above expectations, the Federal Reserve (Fed) announced a 0.75 percentage point increase in the country’s benchmark interest rate, to 1.5-1.75%. Alves says that was enough for the markets to start to ‘panic’, as high interest rates imply a “lock in global growth” and a potential scenario of recession, causing impacts on commodities.

“The scenario of global interest rate tightening indicates a great fear that the world will enter a recession and consumption will fall because of this”, says the expert at Valor.

short term pressed

Arbetman, from Ativa, highlights that the short term for mining and steel companies is one of pressure on the margins.

“Globally, there is very strong pressure on cash costs and margins, both from mining companies and steelmakers”, says the analyst.

According to Arbetman, rising inflation and interest rates in the US are fueling market fears about the unfolding of more cyclical activities, such as basic industries (metallurgy, steel and mineral extraction).

“What the world is going to do to fight inflation is what’s on the table right now. How much the BCs will withdraw from circulation is a variable that will prove to be key for us to have an idea of ​​the strength of this movement”, he adds.

Time to forget about commodities?

Iron ore
It’s too early to say that the commodity boom is over, experts say (Image: REUTERS/Muyu Xu)

Some commodities reached record levels at the beginning of the year, with much of the movement coming as a result of the war in Ukraine.

The boom caused market experts to start projecting a longer bullish cycle for prices – a view that has not changed with the recent fall in the price. Petroleum and iron ore.

For Arbetman and Alves, it is too early to say that the boom has come to an end. Alves agrees, however, that the levels at which commodities were being traded were “unsustainable”.

According to the expert at Valor, the market should begin to see a greater decline in commodity prices if interest rates continue to rise – which, in the scenario projected for the US, seems the most likely to happen.

This is not to say that investors should forget about commodities. Managers are reducing their exposures, but Arbetman and Alves still see interesting investment theses in the sector.

Ativa has a buy recommendation for Vale, for example. Arbetman argues that, even with lower production, the company is prepared to face the most troubled moments, both operationally and financially.

“Even in the face of a more nebulous conjuncture, we see an attractiveness for Vale at the moment”, says the analyst.

Arbetman and Alves cite as a positive point the approval of the new buyback program of up to 500 million shares of the mining company. At current levels, the action is also cheap, they assess.

In relation to Gerdau, the two specialists reinforce the company’s high exposure to the North American market, which, in a scenario of high interest rates, can affect the steelmaker’s operations.

In Alves’ assessment, companies abroad tend to suffer more, since there is no prospect of closing interest rates in the US.

Arbetman recalls that Gerdau managed to present positive results in the first quarter of the year. Still, the company’s low leverage opens the possibility for an increase in the distribution of earnings, says the analyst.

“At the moment, [a Gerdau] pays 30% of net income, but with plenty of cash. With the level of activity in the first quarter, this could gain traction over the next few months”, he says. For now, Ativa has a buy recommendation for the name.

Regarding CSN and Usiminas, the dynamics are different, not least because the two companies are more exposed to the domestic market.

The scenario of inflation and high interest rates ends up having a stronger impact on Usiminas and CSN, says Arbetman. In addition, companies have faced greater competition with imported products.

For both roles, Ativa has a ‘neutral’ recommendation. On the other hand, the analyst of the house highlights that the shares suffered a lot and are very discounted.

In Alves’ opinion, with the prospect of the end of the monetary tightening cycle in Brazil, Usiminas and CSN can “take the return of heating” and increase their sales from next year.

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O Money Times publishes informative articles of a journalistic nature. This publication does not constitute an investment recommendation.

About Yadunandan Singh

Born in 1992, Yadunandan approaches the world of video games thanks to two sacred monsters like Diablo and above all Sonic, strictly in the Sega Saturn version. Ranging between consoles and PCs, he is particularly fond of platform titles and RPGs, not disdaining all other genres and moving in the constant search for the perfect balance between narration and interactivity.

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