China’s latest economic intervention has breathed new life into the mining sector, sparking a rally across major ASX-listed miners. Canaccord Genuity Australia's recent note highlights how Australia’s mining titans, such as BHP, Rio Tinto (RIO), and Fortescue Metals Group (FMG), have surged in response to the country's fresh stimulus measures. These policies are aimed at stabilising China's stalling economy, especially its troubled property market. As the world’s largest consumer of iron ore, any move from China has significant repercussions for Australia’s miners, and this round of fiscal easing is no exception.
China’s Stimulus: A Lifeline for Iron Ore Demand
China’s economic slowdown over the past year has been a thorn in the side of global markets. In the June quarter, GDP growth was just 0.7%, a figure that signals a serious deceleration from previous quarters. For the full year, China’s GDP grew at 4.7%, missing the government’s ambitious target of 5%. The downturn has been exacerbated by a flailing property market, with new housing starts plunging 24% in the first half of the year. This is particularly troubling as the property sector plays a critical role in driving demand for steel—and by extension, iron ore.
In response to these challenges, the People’s Bank of China (PBoC) has unleashed a series of measures, including cutting reserve requirement ratios for banks, trimming mortgage rates, and lowering down payments on second homes. This monetary easing is coupled with a promise of fiscal support from the Politburo, China’s top decision-making body. The objective? Stabilise the property market and, in turn, shore up consumer confidence.
For Australia’s miners, this policy shift couldn't have come at a better time. The impact of China’s stimulus on iron ore demand is already being felt in the market, with iron ore futures edging higher from US$92/t to US$97/t. Citi analysts have a base forecast of US$100/t for iron ore over the next six to twelve months, despite the longer-term challenges as China’s steel production potentially peaks.
ASX Miners Rally: BHP, RIO, and FMG Lead the Charge
In the wake of China’s announcements, BHP, Rio Tinto, and Fortescue Metals have all posted strong gains. BHP surged by 11%, while RIO and FMG climbed 12% and 15%, respectively, over the past week, far outpacing the flat performance of the broader ASX200. The shift is a stark contrast to the underperformance in the banking sector, where major players such as CBA, NAB, and ANZ posted declines amid elevated valuations.
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BHP: Canaccord and Citi have both reaffirmed their "Buy" rating on BHP, largely due to its substantial exposure to copper, which is becoming increasingly valuable in the context of the global energy transition. Copper now represents 30% of BHP’s earnings base, a crucial hedge against potential iron ore weakness. With demand for copper expected to soar due to its role in renewable energy infrastructure, BHP is well-positioned to benefit from medium-term price increases, which Citi forecasts will reach US$12,000/t by 2026, up from today’s US$9,846/t.
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Rio Tinto: While Rio remains heavily exposed to iron ore, which comprises 56% of its valuation, the company’s diversified asset base gives it more flexibility. RIO has significant stakes in aluminium (23%) and copper (18%), both of which are forecast to benefit from structural shifts toward decarbonisation and higher energy efficiency. Rio is trading below its 10-year average, making it an attractive play for investors looking to ride the wave of rising copper and aluminium prices.
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Fortescue Metals: FMG remains the most exposed to iron ore, with 98% of its valuation tied to the commodity. While this reliance makes FMG highly sensitive to iron ore price movements, its strong operational base has allowed the company to leverage the recent upswing in market sentiment. However, Citi remains cautious with a neutral rating, citing concerns over FMG’s elevated valuation relative to its historical average and a forecasted decline in earnings over the next two years as iron ore prices normalise.
Iron Ore’s Long-Term Outlook: Peak Steel?
While the short-term outlook for iron ore is positive, thanks to China’s policy support, the longer-term picture remains clouded. Citi’s analysts note that iron ore prices are likely to stabilise in the US$90-100/t range in the near term. However, as China’s steel production approaches a peak, and with global supply continuing to increase, there are concerns that iron ore could face structural headwinds beyond 2025. Citi forecasts a long-term price of US$85/t.
To counterbalance these risks, miners like BHP and RIO are increasingly focused on diversifying their portfolios, particularly into commodities that are expected to see demand growth from the global energy transition. Copper and aluminium are top picks in this regard, with both metals benefiting from the push toward electric vehicles, renewable energy, and energy-efficient infrastructure.
China’s Influence: The Decisive Factor
China remains the critical factor for Australia’s mining sector. As the world’s largest importer of iron ore, any slowdown or shift in Chinese policy reverberates across the ASX. The latest stimulus measures have provided a welcome reprieve, but whether this translates into sustainable growth remains to be seen.
China’s ongoing property market challenges, coupled with its attempts to pivot to a more consumer-driven economy, suggest that future growth in steel production—and by extension, iron ore demand—may be more muted than in previous decades. That said, as long as China remains committed to large-scale infrastructure development and housing projects, demand for Australian iron ore should remain resilient in the near term.
However, with China’s economy in a state of flux, there’s no escaping the fact that the mining sector is still heavily dependent on Beijing’s policy decisions. Any misstep, or failure to shore up the property sector, could lead to further volatility.
Conclusion: Cautious Optimism Amid China’s Shifting Landscape
China’s recent policy announcements have sparked a significant rally in Australian mining stocks, providing a much-needed boost to a sector that had been struggling with declining iron ore prices. However, while the short-term outlook has brightened, particularly for BHP, RIO, and FMG, investors would be wise to keep an eye on the broader macroeconomic trends emerging out of China.
As the country navigates its economic challenges, the long-term prospects for iron ore remain uncertain. For miners, diversifying into base metals like copper and aluminium, which are integral to the global energy transition, may be the key to sustained growth in a post-peak steel world.
