With China’s credit growth slowing, Morningstar equity analysts continue to expect mined commodity prices to fall materially and for share prices to follow. 

With few exceptions, we continue to see mined commodity and miner share prices as overvalued, propped up by Chinese stimulus. Iron ore’s relative buoyancy since early 2016 is emblematic of most industrial commodities. The steelmaking ingredient’s Indian summer continued into July and August.

The iron ore price rose from $63 per metric ton at the start of July to peak just shy of $80 per metric ton in August, despite record and rising iron ore port stockpiles. Recent conditions have been highly favourable for miners, particularly the bulk miners, as exemplified by our forecast 2017 adjusted earnings for Rio Tinto (RIO), which are in line with 2012 levels. 

We do not expect this to last. With China’s credit growth slowing, we continue to expect mined commodity prices in general, and particularly iron ore, to fall materially and for share prices to follow. Miners we cover, such as BHP Billiton (BLT) and Glencore (GLEN) are generally substantially overvalued, and few trade in line with our fair value estimates.

This reflects our expectation for a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive and more consumption-driven economic growth. High-cost miners and those with outsized exposure to iron ore and coking coal tend to be most overvalued.

Iron ore’s shaky fundamentals were laid bare via a sell-off in the wake of the US Federal Reserve’s September 20 announcement that it would begin to trim its balance sheet in October and would likely hike rates in December. Prices dropped 7% to $63 in response, continuing a sell-off that had begun a week prior. 

Aluminium has fared better than iron ore in the closing days of September, with spot prices on September 20 reaching their highest level since 2012. Prices have moved higher because of better-than-expected aluminium demand as well as the perceived benefits of capacity reductions in China.

• [Editor:Wang Linyan]