Investment bank Jefferies believes iron ore majors BHP Group and Rio Tinto could further divest up to US$25 billion of noncore assets in coming years, and may benefit further given ANZ Research's belief that China's long-term structural shift to high-grade ore is still in play.

Jefferies said in a Dec. 5 note that having spent the last five years consolidating by shedding a combined US$31 billion in assets, re-balancing their balance sheets and returning US$89 billion to shareholders, more could be on the way from BHP and Rio Tinto given the improved macro conditions expected in 2020.

The American multinational bank identified between US$10 billion and US$12 billion of potential noncore asset sales each for both BHP and Rio Tinto.

This could include BHP selling its share of Samarco, which "may require a more accountable ownership structure going forward" having received government approval to restart, the analysts wrote.

Jefferies also flagged NSW Energy Coal within the Mt Arthur property and Cerrejon as possible divestment targets, which combined could net BHP about US$5 billion, though it would take a few years to exhaust the tax losses that reside within Mt Arthur.

The bank also flagged Nickel West and partial sales of Olympic Dam and the Jansen potash project in Saskatchewan, though they would be "difficult and unlikely."

Jefferies believes Rio Tinto will focus on selling its majority share of Iron Ore Co. of Canada Inc., or IOC, a share which the bank values at US$3.2 billion.

However, the Rio Tinto's most significant divestment prospects will come from its aluminum division believed to be worth between US$4 billion and US$6 billion.

Though the near-term focus in aluminum will be cost cutting given the unfavorable market conditions, Jefferies sees significant upside in the medium term if Pacific Aluminium and smaller, non-controlled aluminium assets are divested.

The bank believes that Rio Tinto divesting either small or noncore assets could see free cash flow and capital management rise to double digits, and into the teens if IOC is divested.

Though there are macroeconomic risks, Jefferies says 2020 "appears to be shaping up to be more positive for cyclical valuations and appetite for divestment/asset purchases."

This is a view broadly shared by German asset manager DWS, which said in a Dec. 2 note that "peak pessimism is behind us" and that 2020 will not see a global recession, with Asia leading recovery in developing markets and central banks globally being in easing mode.

DWS sees a structural change occurring, with the services sector surpassing manufacturing as the main driver of growth, while "Phase 1" rhetoric between the U.S. and China over trade has become more constructive.

While DWS sees China's growth slowing to 5.8% in 2020 from 6.2% in 2019, it will be "higher quality growth" focused on consumption.

This positivity is already being felt in the market, with S&P Dow Jones Indices Head of Commodities and Real Assets Fiona Boal noting in a recent blog that the S&P GSCI Gold index "lost some of its luster" in November, down 3.1% on the back of an "overall better risk sentiment."

The S&P GSCI Iron Ore Index rose 7.71% in November after falling 5.9% in October, and ANZ said in a Dec. 5 note that iron ore prices had retreated further in the past week as Vale SA increased production guidance from between 340 million tonnes and 355 Mt in 2020 to between 390 Mt and 400 Mt in 2023.

ANZ said steel market activity will remain weak, though China's renewed clear-air campaign will see the steel industry "under the microscope," which has played out in a shift towards higher grade iron ore amid constraints on steel output.

That issue appears to be abating, with the 65% iron ore's premium over the benchmark 62% index having "completely evaporated" after being as high as 50% in late 2018. However, ANZ believes that is a "short-term interruption in a longer-term structural shift."

"The re-emergence of tough environmental policies and larger blast furnaces should lead to stronger demand for high-grade ore," ANZ analysts wrote.

S&P Dow Jones Indices and S&P Global Market Intelligence are owned by S&P Global Inc.