BHP, Rio Tinto and FMG to Rise Strongly Post COVID-19

Vale, the world’s largest producer of iron ore pellets and nickel, has approved the $US1.5B Serra Sul 120 project in Brazil. Some may remember in January 2019 that Vale had a disastrous dam failure that halted their operations in Brazil, which resulted in Australian mining stock prices rising strongly. From January to July 2019, BHP rose over 20 per cent while Rio increased by 30 per cent and FMG by a whopping 128 per cent.

The materials sector post COVID-19

BHP and Rio Tinto peaked in July of 2019 before falling away with the miners still trading below their highs right now. Fortescue Metals Group (FMG), on the other hand, benefited from the Vale mine shutting down, as it is still up more than 80 per cent on its July 2019 levels. While Vale expects the project to commence in the first half of 2022, I don’t believe this will be a positive move for Australian miners, especially Fortescue Metals.

While Brazil has been hit hard with COVID-19 infections, which is slowing down Vale’s attempts to get the Serra Sul 120 project up and running, the big issue facing Australian miners right now is our strained relationship with China. Currently, Australia delivers roughly 60 per cent of the total iron ore imports to China, which puts BHP, Rio Tinto and FMG heavily at risk if this changes.

Despite the COVID-19 pandemic, exports in iron ore to China have increased by around 8 per cent, which is good news given the that China has imposed bans on beef and tariffs on our barley, not to mention the investigation into wine that caused Treasury Wines to fall heavily.

Australia is a significant player in the world when it comes to metals, so while China is not targeting our iron ore like other commodities, we do need to be prepared, as I believe FMG is most at risk given that it supplies lower grade iron ore.

That said, when the world moves into recovery mode from the COVID-19 recession, the materials sector is likely to create the next boom, as nations focus on infrastructure to stimulate their economies. Given this, I believe we will see a switching of the guard from the tech bubble to commodities in the not too distant future and Australia is well placed to profit from this.

What were the best and worst performing sectors last week?

Interestingly, Materials was the best sector up almost 1 per cent, despite the market being down for the week, followed by Healthcare, which was not too far behind up just 0.8 per cent, while Communication Services was only up slightly for the week at 0.50 per cent. The worst performers included Energy down 5.73 per cent, followed by Information Technology down 3.61 per cent and Industrials down 2.79 per cent for the week.

Looking at the ASX top 100 stocks, the best performers included Whitehaven Coal, which was up over 5.29 per cent, Rio Tinto up 4.48 per cent, while Virgin Money and Adbri were both up over 4 per cent. The worst performers included Origin Energy down 12.01 per cent, IOOF down 9.19 per cent and Oil Search, which ended the week down 8.36 per cent.

What's next for the Australian share market?

It seems that my weekly report is like a record stuck on repeat given that the Australian stock market continues to trade sideways, as it rises some days before falling away. That said, it is starting to decide on a direction, which looks to be down as I have communicated in recent weeks, given that over the last 13 trading days the market has fallen 5.5 per cent. Despite the All Ordinaries Index closing higher than it opened around 50 per cent of the time in the last 13 trading days, the down days have been larger, which indicates weakness in our market.

If the down move continues, the All Ordinaries Index will fall to below 5,800 points and possibly as low 5,400 points, although it could go lower. For now, I recommend that investors continue to be cautious and be prepared to exit if the fall is larger and quicker than anticipated.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.