You can’t make steel without iron ore, and being the world’s largest producer of steel, China buys around 70% of the world’s seaborne iron ore.
It’s no secret that their property sector is struggling. In theory, this should be putting downward pressure on steel demand and as a result, iron ore prices.
But while they‘re down from the highs of the post-pandemic demand boom, it might surprise you that the price of iron ore isn’t as low as we’d expect. Not only is it sitting comfortably above $100 per tonne (below this and people usually pay attention), but Chinese demand has stayed strong.
What could slower Chinese growth mean for investors?
Infrastructure and manufacturing have been more than offsetting the weakness in the property sector. These are things like electric vehicle production, shipbuilding, and the expansion of green energy projects. China has also stepped up its steel exports, funnelling resources to projects in Southeast Asia.
All in all, we see an opportunity to take advantage of a stronger market for iron ore than many would’ve predicted. Here are two ways to invest.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. Ratios shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Rio Tinto
When it comes to UK-listed mining giants, Rio Tinto is one of the most exposed to iron ore and its revenue is heavily weighted toward China.
Revenue by geography
Revenue by product
Source: Rio Tinto interim results 2023 – accessed 10/11/23.
Rio’s iron ore operations are focused in the Pilbara region of Western Australia, where it’s operating 17 mines. The Pilbara blend is world-renowned for its high-grade quality and consistency. This is key because the better grade means reduced emissions during the steel-making process – something producers are always keen to take advantage of.
Rio’s expecting it to cost on average around $21.0-$22.5 per ton to produce its iron ore product over this year. Costs have been rising, largely due to inflated input costs.
However, we’re starting to see things ease. Iron ore prices are down from the highs seen last year, but remain at levels that mean the iron ore business is a major cash cow for Rio (it brought in $5.6bn in free cash flow over the first half of the year).
Some of that cash can then be pumped back into the business. It’s expensive to run mines, and even more costly when you add in expansion. $7bn is expected to be spent on capital expenditure over 2023. That's forecast to rise to $10bn over 2024-25, with up to $3bn earmarked for growth.
There are already two key growth projects.
The first is a huge copper mine in Mongolia – a continued strategic shift to try and increase exposure to metals contributing to global decarbonisation.
The second is Simandou, a big iron ore project out in Guinea. It’s one of the few major sources of new iron ore supply anywhere in the world. It’s early stages though, and material supply isn’t expected until the end of the decade. The lack of near-term new supply is another reason we think prices can hold firm over the next few years.
Rio’s management of material environmental, social and governance (ESG) issues is strong, according to data from Sustainalytics. But it was a little disappointing to see management warn it’ll be unable to hit its interim target of a 15% reduction in scope 1 & 2 emissions by 2025 without carbon offsets – something to keep an eye on.
Rio has some quality assets and could be well placed to benefit from a strong iron ore market – should it stay that way.
With a valuation some way below peers, we see this as an attractive entry point. As ever, there are no guarantees and near-term performance could be volatile.
View the latest Rio Tinto share price and how to deal
Sign up for updates on Rio Tinto
Anglo American
Anglo offers something slightly different. There’s still a decent-sized iron ore portfolio, just not to the extent of Rio. But China does account for over a quarter of revenue – so it’s enough to move the dial.
It’s also got exposure to steelmaking coal (sometimes referred to as Metallurgical or coking coal) – a key ingredient in steelmaking.
Revenue by geography
Revenue by product
Source: Anglo American interim results 2023 – accessed 10/11/23.
We like the diverse mix of commodities, many of which contribute to the global de-carbonisation effort. It should be a longer-term growth driver away from whatever happens in the iron ore market.
Anglo’s relatively high copper exposure is a big differentiator, with key production locations in Chile and a recently ramped-up operation in Peru.
The Quellaveco mine in Peru has been increasing production since mid-way through last year and reached commercial output levels in June. The extra output helped copper production soar 42% over the third quarter.
We're also excited about the potential for the Woodsmith project. This is a major UK mining project which will give a fresh avenue into crop nutrients after its expected opening in 2027.
It’s not been without its hurdles, and delays meant Anglo took a big impairment charge last year. But the site has some key advantages. Its scale and high grade allow for efficient mining, and on-farm demonstrations of the product in use have been positive.
Anglo is an industry leader in terms of its management of key ESG risks, boasting a strong set of policies and programmes according to Sustainalytics.
Its key strengths include the renewable energy programme that’s expected to fully meet the needs of operations in Chile, Brazil, Peru, and South Africa (around 70% of total assets). Climate targets and tailings (waste) management are aligned to global standards.
China isn’t as big a lever for Anglo as some peers, but it’s a big part of the pie. We see this as a more diversified way to gain exposure to the Chinese steel market, while also having a decent stake in the megatrend of de-carbonisation. As ever, there are no guarantees and performance is likely to be tied to the strength of the global economy.
See latest Anglo American share price and how to deal
Sign up for updates on Anglo American
Unless otherwise stated estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
Share insight: our weekly email
Sign up to receive weekly shares content from HL.
Please correct the following errors before you continue:
Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.