Fortescue Metals Group Ltd [ASX:FMG] and Champion Iron Ltd [ASX:CIA] both rallied this morning in trading. FMG climbed 3%, to a high of $6.35, and CIA was up more than 17%, to a high of $1.02.
What happened to Fortescue and Champion Iron?
Recently, the iron ore price hasn’t has the best run. Since February, the metal has slid from above US$94 a tonne, to below US$88 a tonne. But, this morning, the price of iron ore rallied back above US$88 a tonne.
Reported by Business Insider Australia:
‘Iron ore spot markets sprung back to life on Monday, ripping higher following another ridiculously large rally in Chinese steel futures.
‘And with the latter jumping again in overnight trade, the strength in spot markets may well extend into a second session on Tuesday.
‘According to Metal Bulletin, the spot price for benchmark 62% fines jumped by 1.78% to $88.26 a tonne. It was the first increase since March 7, and the largest in percentage terms since February 27.’
The rally is highly favourable to iron ore miners like FMG and CIA. Revenues for both companies rely on the price of iron ore. So, the more that iron ore rallies, the better off FMG and CIA are.
What now for the iron ore price?
It’s highly unlikely that the iron ore price will remain steady from here. In the last year, iron ore has traded at between US$48 and US$94 a tonne. It’s an extremely wide range, and can significantly affect earnings either way.
For the iron ore price to remain at a higher level, a lot will depend on China. The Chinese are one of the biggest importers of iron ore in the world. Turning the iron ore into steel, China is feverishly building infrastructure to grow their economy.
But it’s possible that you won’t see another turnaround in resources like we did in 2016. And if we do, you could be waiting a while. Unless commodity prices suddenly move higher, earnings will likely stagnate.
That’s why some investors prefer the smaller end of the market.
Smaller miners are a riskier investment, there’s no running away from it. But they could potentially grow earnings 10-fold in a short space of time. Resource specialist Jason Stevenson is no stranger to explosive resource stocks.
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Junior Analyst, The Daily Reckoning