The Fortescue Metals Group Limited (ASX: FMG) share price has continued its stunning form and is the best performer on the ASX 200 on Monday.
In early afternoon trade the iron ore producer's shares are up 3.5% to a two-year high of $6.72.
This latest gain means that Fortescue's shares are now up 60% since that start of the year. Only Afterpay Touch Group Ltd (ASX: APT) and Appen Ltd (ASX: APX) have performed better on the index in 2019.
Why is the Fortescue share price at a two-year high?
The key driver of its 60% gain this year has been the dam disaster at Vale's operation in Brazil earlier this year.
At the time, Vale warned that it could pull as much as 40 million tonnes out of the iron ore market because of the disaster. As this is a significant amount of global production, it has led to supply concerns and pushed iron ore prices notably higher.
In fact, on Friday low grade iron ore prices hit multi-year highs. According to Metal Bulletin, the price of 58% fines rose 1.5% to US$70.38 a tonne.
This latest rally appears to have been caused by a decline in steel prices, leading to increased demand for lower cost 58% fines from steel producers in order to support margins.
Unfortunately for higher grade producers such as BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), the price of benchmark 62% fines dropped 0.8% to US$86.52 a tonne and the price of 65% fines fell 0.7% to US$97.50 a tonne.
Should you buy Fortescue's shares?
Whilst I think Fortescue's share price rally was justified this year, I feel its shares are fully valued now and would only suggest investors buy them if they expect low grade iron ore prices to continue to appreciate.
As I'm not convinced prices will go materially higher from here, I would stick with diversified miners such as BHP or Rio Tinto for the time being.
