Should you buy Fortescue Metals Group Limited today?

The iron ore price has been holding up surprisingly well, as has Fortescue Metals Group Limited (ASX:FMG) in recent times.

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The iron ore price took a beating during the latest session, sparking fears that the commodity could be facing a fresh round of weakness.

Indeed, the iron ore price has held up surprisingly well over the last few months – especially considering the enormous levels of uncertainty regarding China's economic growth prospects. It has traded within a narrow range most recently with an average price around the US$55 a tonne mark, exceeding the expectations of many analysts and investors who expected it to fall into the US$30s.

According to data from the Metal Bulletin however, the commodity, which is a key ingredient used to make steel, fell 5.2% during the most recent session to US$53.14 a tonne.

The fall followed reports from Port Hedland – the highest tonnage port in Australia – that iron ore exports had hit an all-time high in September as the country's biggest miners boosted their outbound shipments. A total of 39.4 million tonnes were exported, surpassing the previous record set in August of 39.2 million tonnes.

Where to now?

It's impossible to predict, with any accuracy, what commodity prices will do in the near-term. In other words, I don't know if Friday's fall marked the beginning of another heavy slide for iron ore prices, and nor would any analyst, despite what many might say.

But we can look at a number of macroeconomic trends to get a sense of where the iron ore price might go in the medium term. While growth in China's demand for the resource is decreasing, the output from the world's largest producers is increasing which will almost certainly put pressure on the commodity's price going forward.

While a lower price will likely squeeze some of the world's high-cost producers out of business, the bigger players such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Vale will likely fill the void with their own supplies.

Although BHP Billiton and Rio Tinto are well equipped to survive a downturn, given their low cost operations, their margins will likely come under pressure which could see their earnings fall.

Fortescue Metals Group Limited (ASX: FMG) is another miner at risk, especially considering its heavy debt load which will become increasingly difficult to repay as the iron ore price falls. Even though its shares are trading at just $1.88 – down 45% over the last 12 months – there is every chance they could fall even further.

Although these three companies form a major part of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) – accounting for a combined 7.5% of the index – investors would do well to avoid their lure and focus their attention elsewhere.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest. 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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