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Andrew Forrest buys shares in Fortescue Metals Group: Should you?

Andrew ‘Twiggy’ Forrest, chairman and majority shareholder in iron ore play, Fortescue Metals Group Limited (ASX: FMG), has waded into the market, adding another 1.75 million shares to his holding.

Mr Forrest now holds 1,031 million shares in Fortescue, currently valued at more than $4.35 billion. The purchase indicates that Mr Forrest is very comfortable with the company’s future, despite the iron ore price sliding 33% this year, to around US$90.70 per tonne, just off its lowest price in 21 months.

And it’s despite Fortescue telling its Chinese customers that it would offer them a 14% discount on its lower grade ore, a move that has been followed by Rio Tinto Limited (ASX: RIO). The iron ore price is based on ore with 62% iron content, while Rio’s Robe River fines hold 57% iron content. Rio announced discounts of between 6% and 13%, commencing from July 1. Those are large discounts compared to the discounts of around 2% offered last year.

Tim Murray, managing partner of J Capital Research has told Fairfax Media, “Demand for low quality product is plummeting.

Lower grade ore is cheaper because it is more expensive for the steel makers to process, and importantly for China, has higher emission levels.

With a clear oversupply in iron ore, steel makers hold the upper hand. Some estimates suggest that Chinese steel production has actually dropped by 2% this year while imports of iron ore have jumped 20%, thanks mainly to Rio, BHP Billiton Limited (ASX: BHP) and Fortescue ramping up exports.

Add in massive stockpiles of iron ore at Chinese ports and the downward pressure on the iron ore price is likely to continue for some time.

So far, whenever Mr Forrest has waded into the market buying shares in the past, fears appear to have been overdone, and he appears to have timed his buys perfectly. The market doesn’t appear to be convinced though, with Fortescue shares trading virtually flat around lunchtime – which could be a warning sign for investors.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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