Why ASX iron ore stocks like the Fortescue (ASX:FMG) share price are surging today

ASX iron ore stocks are on fire today and we can thank their Brazilian counterpart for this.

The Fortescue Metals Group Limited (ASX: FMG) share price surged 11.7% to a record high of $20.36 and is the best performing stock on the S&P/ASX 200 Index (Index:^AXJO) at the time of writing.

The BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price aren’t far behind. They both gained more than 4% each!

ASX iron ore stocks benefiting from Vale’s downgrade

A production forecast downgrade by rival Vale SA sparked the bullish optimism. The Brazil-based miner said it will only management to produce between 300 million and 305 million tonnes of iron ore in 2020.

This compares to its earlier forecasts of 310 million to 330 million, reported the Australian Financial Review.

Next year’s output is also lower than expectations with Vale predicting it will produce 315 million to 335 million tonnes.

Production cut triggers price rally

The production cut was doubly disappointing for Vale shareholders as some analysts were expecting it to upgrade production. It’s recent quarterly updates had pointed to rising volumes as Brazil tries to recover from the COVID‐19 disruptions.

The news sent the iron ore price jumping nearly 3% to over US$134 a tonne. The price of the commodity is up by 52.7% over the past 12 months.

The most-traded iron ore contract for January delivery on China’s Dalian Commodity Exchange surged as much as 3.5% to a record high of 934.50 yuan ($US142.44) a tonne, before ending daytime trade at 934 yuan, reported Reuters.

ASX iron ore miners are cum-upgrade

Experts think the price could keep rising into 2021 too as the iron ore market is expected to remain tight for at least six months.

We are likely to see consensus earnings upgrades for our iron ore majors too. Analysts have been assuming iron ore prices will fall from current levels.

Even at the prevailing spot price, the three majors would see substantial valuation uplifts.

It isn’t only the three ASX iron ore giants that’s running hot today too. The latest ASX iron ore exposed stock, the Deterra Royalties Ltd (ASX: DRR) share price, jumped 4.3% to a high of $4.96 during lunch time trade.

Geo-political implications

The misfortunes of Vale come at a time when relations between China and Australia is the worst it has ever been too.

This could put some power back into the hands of the Morrison government in the wake of China’s tariff war on Aussie coal, wine, barley and timber.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Deterra Royalties Ltd and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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