Why the Fortescue share price is soaring today

The Fortescue Metals Group Limited (ASX: FMG) share price has jumped more than 7% in early trading to above $1.82, after the spot iron ore price soared 6% overnight to US$46.26 a tonne.

Chinese metals traders were back at work after a week off for the New Year celebrations, but the price rise may only be a temporary reprieve. The China Iron and Steel Association (CISA) recently reported that restocking of iron ore inventories was relatively strong in January, but not strong enough to move the iron ore price much.

But CISA gave a warning too saying, “Low smelter utilisation rates cannot support any increase in iron ore prices, and though factors like the Spring Festival holiday slowed the price decline, the overall downward trend has not reversed.” [Emphasis mine]

In other words, iron ore prices aren’t likely to move much higher and are more than likely to continue falling in the face of weak demand and massive oversupply.

The jump in the iron ore price also saw the BC Iron Limited (ASX: BCI) share price zoom more than 12% higher to 9.1 cents. BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) also saw their share prices rise 2.3% and 2% respectively on the back of the iron ore news.

Smaller miners with higher costs and Fortescue – Australia’s third-largest iron ore producer typically have higher costs and lower margins than the big two BHP and Rio, so as the iron ore price rises, their margins expand typically at a faster rate. However, Fortescue’s cash costs of production are approaching that of Rio and BHP and may even overtake them at some point.

Foolish takeaway

The Fortescue share price might be up today, but is highly volatile and could easily be back down tomorrow or next week if the spot iron ore price sinks.

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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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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