As the global economy starts to recover from the coronavirus pandemic, I have been looking for FTSE 100 stocks to add to my portfolio. There are two blue-chip companies, in particular, I think will benefit more than most from the recovery.
FTSE 100 recovery stocks
Over the past six months, the price of iron ore has surged. The commodity, which is a critical component of steel, has benefited from two different tailwinds. These are rising demand and constrained supply as the pandemic has wreaked havoc with global supply chains.
As a result, in the past few days, the iron ore price has hit an all-time high of more than $220 per tonne in Asia. This is fantastic news for producers of the commodity such as Rio Tinto (LSE: RIO) and BHP (LSE:BHP).
The former is the largest iron ore producer globally, while the latter is the world’s largest miner, full stop. Both have colossal iron ore operations and benefit from significant economies of scale.
Take Rio, for example. According to the miner’s first-quarter trading update, management is targeting iron ore production of 325mt-340mt this year. The company’s production cost per tonne will be in the range of $16.70 to $17.70.
Meanwhile, towards the end of April, BHP announced it was on track to achieve the upper end of its full-year iron ore target range of 276mt-286mt. In addition, management is trying to push production costs down to the lowest level in the industry.
There will be other costs to consider, but assuming BHP and Rio can mine a tonne of iron ore for less than $20, and it’s selling for more than $220, that implies these FTSE 100 firms are set for bumper paydays this year.
Risks and challenges
The one considerable risk of investing in mining companies is that commodity prices can fall as fast as they rise. BHP and Rio may be on track to generate record profits this year based on today’s prices, but there’s no guarantee the environment will last.
Another wave of coronavirus or sudden increase in interest rates could lead to a slump in demand. This could have a significant adverse effect on the shares.
It may also jeopardise these companies’ dividend plans for the year. Analysts are forecasting a yield of 7.8% on BHP’s shares and 10.1% for Rio. These are just forecasts at this stage.
Still, despite these risks and challenges, I think the outlook for both of these companies is bright. As such, I’d invest £5,000 in both FTSE 100 stocks today. I believe the economic recovery should help keep iron ore prices elevated for some time. Of course, they may not stay at record levels. But Rio and BHP’s low cost of production should work in the two firms’ favour if the price of the steel ingredient suddenly collapses.
