Will The Iron Ore Price Continue its Three-Month Rally?

Do you know why the market is up today?

BHP Billiton Ltd [ASX:BHP] has climbed back to profitability. This morning the big miner released full-year results for FY17.

Revenues rose 24%, to US$38.2 billion. The Aussie miner also reported a profit of US$5.9 billion, which is an improvement on the US$6.4 billion loss in FY16.

The miner also increased its final dividend to 43 cents per share, more than triple the prior final dividend.

Investors bid the stock up as much as 2%, to $26.12 per share.

Such growth from the big miner was expected. In fact, underlying profits were well below expectations according to The Australian Financial Review:

BHP reported a net profit of $US6.7 billion ($8.4 billion), well below analyst expectations of a $US7 billion and up sharply on last year’s result of US$1.2 billion.

The question is: Can BHP keep up its momentum? It really comes down to what commodity prices do.

The volatile commodity that is Iron Ore

A key commodity for BHP is iron ore, which has been one of the most volatile commodities in 2017.

Just look at how the iron ore price has swings up and down with this year alone.

Iron Ore Price - 22-08-17

Source: Bloomberg

These volatile price swings have less to do with rising and falling demand and more to do commodity speculators. Commodity traders have helped drive iron ore to both highs and lows throughout the year.

But if you have a long-term view on the commodity, you’d likely be bullish on iron ore. You can’t make steel without iron ore, and you can’t build offices, apartment buildings or shopping malls without steel.

So if China and other developing countries want their massive populations to move into urban areas, they’ll need to keep consuming iron ore and building infrastructure to meet demand.

Another thing to watch out for is an Aussie dollar slump. A lower AUD means commodity exporters like BHP stand to gain as exports become more competitive. And, as it happens, an AUD crash might be just around the corner. Details here.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money


Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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