Times are tough for Fortescue Metals Group Limited (ASX: FMG) shareholders. Not only are their shares hovering at an eight-month low of $4.58, but there are strong signs of them falling even further.
Here are three reasons why that could be the case:
1. Throughout 2013, iron ore was trading at an average price of roughly US$135 a tonne. It is now hovering at just above US$102 a tonne.
2. As if the 24% drop in iron ore price wasn’t enough, analysts are expecting it to drop as low as US$80 a tonne in 2015. While Fortescue will still remain profitable at that price, it will have a significant impact on the company’s overall earnings.
3. Fortescue Metals Group is a pure iron ore play, leaving it far more susceptible to volatility in the commodity’s price. Notice how its two larger, more diversified, iron ore miners haven’t fallen as heavily. Since the date Fortescue hit its $6.22 high (it has fallen 26.4% since), BHP Billiton Limited (ASX: BHP) has dropped just 4.3% and Rio Tinto Limited (ASX: RIO) has fallen 12.6%.
A much better bet than Fortescue
Fortescue is far too susceptible to movements in the price of iron ore, making it an unappealing investment in my mind.