Fortescue Metals Group Limited (ASX: FMG) could be in for further pain after the iron ore price shed another 2.4% overnight, slipping to just US$57.12 a tonne, according to the Metal Bulletin.
Fortescue, which is Australia's third largest iron ore miner and the fourth largest in the world, rallied strongly in April on the back of a strong rebound in ore prices. In roughly five weeks, the commodity regained 34% of its value, climbing just above US$63 a tonne, up from US$47.
But the commodity has once again fallen into a downward spiral and there are signs it could be in for another heavy drop. To begin with, China steel prices hit their lowest level in more than a decade earlier in the week as their expansion continues to slow down, while at the same time, miners around the world are increasing their production output in response to the commodity's recent climb.
To make matters even worse, China has just inked a deal with Vale, the Brazilian-based mining giant, which will see it invest in Vale's enormous 'Valemax' iron ore carriers. It will also help the miner fund its multi-billion dollar expansion by lending it up to US$4 billion, which will enable Vale to produce roughly 90 million tonnes of high-quality ore at a discounted price.
Given the enormous supply and demand imbalance in the economy right now, an additional 90 million tonnes of supply is the last thing the industry needs, and will likely push the commodity's price down even further. While that is bad news for the industry's biggest players, including BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), it's even worse for Fortescue and other junior miners which maintain higher operating costs than the majors.
Fortescue's shares rose 2.9% on Thursday, but have fallen 19% since peaking at $2.63 late last month. Given the headwinds facing the sector, investors would be wise to avoid the miner altogether.
