Kumba stays on upward trajectory
But external factors may yet add to iron-ore volatility
Shares in mining group Kumba Iron Ore jumped a further 8.46% last week, adding to gains for one of the best-performing stocks on the local bourse in 2017.
This is despite an uncertain outlook for iron-ore prices.
Economic data releases, particularly from China, have supported commodities in recent weeks, with iron ore extending recent gains on Friday after Chinese steel mills cut production by less than was expected, amid environmental efforts by authorities.
In the longer term, analysts are watching for any effect of US President Donald Trump’s push for China to reduce excess steel capacity, after Trump began a trip to Asia on Friday. Political moves in China, as it proceeds with the $1.3-trillion One Belt One Road infrastructure project are also being watched.
The JSE-listed Anglo American subsidiary was benefiting from momentum on global markets but might be trading a little ahead of what was considered fair value at present, said IG senior market analyst Shaun Murison. The share price momentum remained strong and it was uncertain where the near-term top might be, he said. Rand weakness has helped push Kumba shares higher in past weeks. The company added 83.04% so far in 2017 to R291.04 on Friday, bolstered by strong first-half results in July.
The company offered a surprisingly large dividend, further pleasing the market by increasing headline earnings per share 53% as well as improving operational efficiency.
In October, Anglo raised Kumba’s annual production forecast by 1-million tonnes to 44-million, but the company had a relatively soft third quarter.
"A lot of the current momentum in the industrial resource counter space is being fuelled by a healthier looking global economy and its effect on demand sentiment," said Murison.
"While Kumba is looking a much stronger company than it was a year ago, its fate remains largely in the hands of external forces, namely the volatility of iron ore, which does still find itself being heavily supplied to the market," he said. The iron ore price has been volatile in 2017, with a number of environmental, trade and infrastructure spending issues in China still up in the air.
The Northern China import price of 62% Fe-content ore was $59 a tonne on Friday but is well off a March high of $90.
Unexpected demand for coking coal and iron ore had initiated strong buying, as the Chinese war on smog might not live up to expectations, said SP Angel analysts. The recent re-election of Chinese Premier Xi Jinping has also bolstered the prospect of a massive infrastructure spending in countries along the ancient Silk Road linking Europe and China.
BHP forecast the Chinese One Belt One Road initiative could boost global steel demand by 150-million tonnes, which is roughly 10% of global production at present.
BHP said in September that the estimate — a calculation based on 2,000 projects linked to the initiative — could represent annual growth in demand of 3% to 4%. BHP’s base case was that Chinese steel production had yet to peak and would do so only around 2025.
But a decision in October at the Communist Party of China’s 19th congress increased project risk, as political decisions could push ahead of economic viability, SP Angel analysts said.