Here's why Fortescue Metals Group Limited is falling today

Fortescue Metals Group Limited (ASX:FMG) is down 10% already and could go much further!

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What happened? Fortescue Metals Group Limited (ASX: FMG) shares today continued their descent from a short-term high of $2.65 reached last week following a sharp recovery in the iron ore price above US$60 per tonne.

Fortescue's shares fell another 5% on Thursday morning to $2.38, representing a 10% decline over just a few trading days as the iron ore price fell another 0.5% overnight to just above US$62 per tonne.

Seems odd? The issue with Fortescue is that the share price is extremely sensitive to three factors over the short term; the iron ore price, the exchange rate between the Australian and US dollars, and also the oil price.

While the reliance on the iron ore price is understandable, Fortescue's profit is potentially just as heavily impacted by the exchange rate. A lower Australian dollar means that the company receives more Australian-dollar denominated revenue for each tonne of ore sold, but it also means that it needs to pay more Australian dollars in interest repayments for its US-dollar denominated debt.

Similarly, part of the reason why Fortescue has been able to drastically reduce its all-in delivered cost to send ore to China has been because of the fall in the oil price. Not only has this reduced the cost of running the company's fleet of trucks, but the cost of ship transport between Australia and China has also drastically fallen.

Overnight we saw the Australian dollar break above the 81 US cent mark, up from below 79 cents just three trading days ago! Couple this with a slight fall in the ore price and, despite the small fall in the oil price overnight, Fortescue's shares were bound to fall today!

What now?

Fortescue remains one of the most shorted stocks on the ASX, implying that traders believe it's at risk of falling further. It's operating on very small profit margins – far lower than it was a couple of years ago and much lower than that of larger peers Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP).

Motley Fool contributor Andrew Mudie owns shares of Fortescue Metals Group Limited. You can find Andrew on Twitter @andrewmudie The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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