Fortescue Metals Group Limited enters bear market territory – what investors need to know

The iron ore miner is down 20% this year.

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Today’s market-wide heavy selling across the board has many ducking for cover, as once again investors are forced to question the sustainability of the rally in equities which has seen the US indices hit record highs, and the Australian market hit a five-and-a-half year high.

One stock which has been under particularly heavy pressure both today and this year is Fortescue Metals Group Limited (ASX: FMG). By mid-afternoon on Wednesday the iron ore miner’s share price was down over 3%. Of more concern is the fact that the stock has now fallen over 20% this calendar year.

The down trend in Fortescue’s share price has roughly mimicked the fall in the iron ore spot price which is down well over 20% in the past 12 months, placing the commodity firmly in bear market territory.

The recent poor performance of Fortescue highlights the downside of a single-commodity exposed miner. While they can offer greater leverage when a commodity price is rising, they can also be totally exposed when the price falls.

In comparison, diversified miners such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are better equipped to withstand the impact from a fall in iron ore prices or any single commodity. This is reflected in their relatively better share price performance this calendar year – their shares are down 2.1% and 11.2% respectively.

Foolish takeaway

Accurately predicting the iron ore price is a complex task. Recent data out of China continues to paint a fuzzy picture of exactly how its economy is tracking, but it would seem evident that the nation’s demand for iron ore has been weakening to some degree. The combination of a slower growing Chinese economy, with the increased supply of iron ore that has recently come on-stream, means shareholders in singularly-exposed iron ore miners such as Fortescue need to remain very attentive to developments.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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