Investors might want to consider staying away from Fortescue Metals Group Limited (ASX: FMG) shares if one mining executive's predictions prove accurate.
According to Cleveland-Cliffs managing director Lourenco Goncalves, courtesy of the AFR, Fortescue could be the next Atlas Iron Limited (ASX: AGO).
Seven years ago today, the Atlas Iron share price was as high as $4.20. Today it is 99% lower at just 4.2 cents.
Why is Fortescue being tipped as the next Atlas Iron?
During a discussion about price discounts which are being applied to lower grade iron ore, Mr Goncalves suggested that changing dynamics in the iron ore market could lead Fortescue Metals into financial distress.
While I'm not as bearish on Fortescue as Mr Goncalves is, I do agree that the preference for higher grade ore and the widening discount it is experiencing is a major concern.
Why is high grade ore preferred?
The biggest consumer of iron ore is of course Chinese steel makers. Unfortunately, for low grade producers like Fortescue Metals, these steel makers are buying higher grade ore right now.
Higher grade products, which produce more steel for each tonne that is used and can also reduce emissions, have been growing in demand on the back of potential production cuts and pollution concerns.
Chinese regulators are aiming to reduce smog by forcing heavy industry in cities around Beijing to slash production during the winter heating season.
Should you sell your Fortescue shares?
As things stand now, I would be a seller of Fortescue Metals' shares and a buyer of more diversified and higher grade producers such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
However, it could be worth holding on for a few more days as Fortescue Metals is expected to update the market on its pricing and exports on Thursday of this week. But if there's no improvement, I would move on in a hurry.
