Why the Fortescue Metals Group Limited share price has tumbled today

Credit: Chatham House

Shares of Fortescue Metals Group Limited (ASX: FMG) fell as much as 7.4% today to a low of $3.11, although they have since rebounded marginally to $3.175, down 5.5%. By comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is trading flat for the day.

Indeed, Fortescue’s decline has come as a result of a pullback in the price of iron ore. The commodity soared above US$70 a tonne for the first time in more than a year late last week, but has since retreated more than 6% to US$66.07 a tonne, according to The Metal Bulletin.

While the fall in Fortescue’s share price could be partially attributed to that decline, it’s also possible that investors are becoming increasingly wary regarding the outlook for the iron ore price.

On the one hand, Credit Suisse appears rather bullish on the metal. The Australian Financial Review quoted analyst Matthew Hope as saying: “Iron ore has more upside while the Chinese steel rally lasts”, suggesting the iron ore price could remain strong (or even grow) as the year goes on.

Others are not so confident. Goldman Sachs, for instance, thinks it will drop to US$35 a tonne before the end of the year while executives from BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have even expressed their doubts regarding the sustainability of the recent rally. Iron ore is still trading more than 70% higher than it was at its low in December 2015.

Although Fortescue has done a great job of reducing its production costs, putting it on roughly the same level as its larger rivals, a lower iron ore price would still crimp margins and could make it more difficult to grow earnings and pay down debt.

Fortescue’s share price has now fallen 13% since its high of $3.65 on Thursday last week, but is still trading well above the $1.44 low it hit in January. Investors have done extraordinarily well during that time, but may want to take a more conservative approach now that the shares have made something of a recovery.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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