At time of writing, Fortescue Metals Group Ltd [ASX:FMG] shares are trading at $3.61. While this is a slight improvement from yesterday’s figures, it’s still hovering uncomfortably close to the 52-week low of $3.51.
As one of the largest global iron ore producers, recognised as being the lowest cost seaborne provider of iron ore to China, it’s safe to say Fortescue Metals are feeling the repercussions of the changing economic basis of China — the largest iron ore consumer in the world.
China’s clampdown causing trouble for Fortescue share price
China is fed up with the loss-making practices of their investment-led economy, largely fuelled by infrastructure projects. So they’re pulling the plug on debt-inducing sectors — such as excess steelmaking — in an effort to clean up their economy.
This puts a damper on iron ore demands, because the most iron-hungry sector is having its reigns pulled in.
Of course, they can’t get rid of the steel sector entirely. They just need to improve its quality. And this has been the one upside for our iron ore miners, as the demand for high-grade iron ore has grown to heights where we can sell the resource at high prices.
But this is even more bad news for Fortescue Metals. Their iron ore yields are predominately low-grade. At the moment, no one wants them.
The low-grade stuff requires more energy to convert to steel, which means more toxic emissions — not ideal for a country wanting to minimise their pollution levels.
The result? Fortescue have no choice but to run their resource trades at drastically discounted prices, because there is simply very little demand for them. No doubt this is what is driving their share price so low.
Possible turnaround for fortescue metals share price?
Though Fortescue Metal’s current share price is sitting nearly 40% down from its 52-week high of $5.99 (recorded this time last year), there are those who remain somewhat positive about the future of this mining company.
Key investor Macquarie Group Ltd [ASX:MQG] have revealed that they maintain their outperform rating on the shares of Fortescue. They are confident Fortescue will produce a higher return on investment than the current figures are reflecting.
Macquarie has a price target on Fortescue shares of $4.80 each. This would mean a 35% increase from the current dismal price drop over the course of the next 12 months.
Though it seems like a long shot from this angle, a $4.80 price target is still a significant discount from other Aussie mining giant, BHP Billiton Ltd [ASX:BHP]. This company is currently trading shares at $31.75, and are part of the same market sector.
That’s a lot less shares for your buck if you go straight for the big guns.
The future for Fortescue
Despite this small glimmer of hope, it’s very disconcerting to see Fortescue shares sink lower and lower since June of this year.
Of course, if these trade tensions subside, there’s room for this sector to commence its upward climb again.
Only time will tell how successful this potential rebound will be.
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