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Cash generation among ASX 200 iron ore shares will ‘be significant’ in 2022: expert

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S&P/ASX 200 Index (ASX: XJO) iron ore shares have seen some big swings up and down over the past 12 months.

This was predominantly driven by some wild moves in iron ore prices. The industrial metal reached US$233 per tonne in May last year before sliding all the way to US$87 per tonne by November.

On Tuesday, iron ore fell 9.7%, dragging ASX 200 iron ore shares down with it. Yesterday, prices rebounded by 2.4% to US$139 per tonne. As you’d expect, that helped boost the prices of the big ASX mining shares.

While the ASX 200 closed down 0.78% yesterday, BHP Group Ltd (ASX: BHP) shares finished the day up 0.8%; the Rio Tinto Ltd (ASX: RIO) share price closed up 0.2%; and Fortescue Metals Group Ltd (ASX: FMG) shares closed 1.7% higher.

With so much of these big companies’ fortunes riding on the price of iron ore, what’s the outlook for the remainder of the year?

Low-cost production equals strong profit margins

For an answer to the outlook for iron ore prices – and the profit margins of ASX 200 iron ore shares – we defer to Commonwealth Bank of Australia director of mining and energy commodities research, Vivek Dhar (courtesy of ABC News).

Commenting on the sharp fall in iron ore prices earlier this week, Dhar said, “Markets are worried that Beijing in particular may be exposed to more severe lockdowns, like what we’ve seen in Shanghai.”

As you’re likely aware, China remains intent on its zero-COVID policy. A policy that’s sent Shanghai – a city with more residents than all of Australia – into extended, crippling lockdowns. The virus is still spreading, and authorities’ lockdown measures could as well.

For that reason, Dhar believes demand for iron ore from China’s steel factories will be weak over the next several months. But he doesn’t expect iron ore prices to plummet back to the November 2021 lows this year.

Dhar expects iron ore to trade in the range of US$120 per tonne to US$160 per tonne this year, potentially falling to US$100 towards December. That’s well above the Aussie Government’s own forecast of US$55 per tonne.

And it should see ASX 200 iron ore shares remain well in the profit zone.

According to Dhar (quoted by ABC News):

When it comes to the profitability of Australia’s iron ore sector, it is still very, very strong. We sit very fortunately as the lowest cost producers of iron ore and, together with some Brazilian operations, I think that’s going to be very profitable.

The cash generation is going to be significant.

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