The Fortescue Metals Group Limited (ASX:FMG) share price has had a dream year so far, rocketing from as low as $4.47 in early January 2019 to close yesterday at $8.85. What exactly is driving these changes, and is the run over?
Iron ore bounces back
Andrew Forrest’s Fortescue Metals Group is one of the largest iron ore producers in the world, with global exports from a number of mine sites throughout Western Australia. As most readers would know, the largest purchaser of iron ore produced by FMG is China; in FY18, 80% of the company’s revenue was generated by purchases originating in the country.
Currently, the benchmark iron ore price is around US$115 per tonne, which represents a nearly 50% increase since the beginning of the 2019 calendar year. Fortescue, like most companies that deal in the export of commodities, benefits greatly from this increased price.
The above is occurring in the context of increased demand for steel from Fortescue’s largest consumer, China, which is largely a result of domestic stimulus measures instituted by Beijing.
Even though FMG announced a 60 cents per share return in May 2019, there is still speculation that a strong August dividend remains in play for the company. This speculation is of course driven by the strong earnings numbers as a result of the phoenix-like rebirth of the iron ore market. It remains to be seen whether such a dividend will be announced, and what percentage return could be expected.
The outlook for Fortescue
As many investors learned over the past few years, Australian mining is often at the whim of larger market forces. In the case of Fortescue, the two driving forces are demand for steel in China, and the benchmark price for iron ore. The two are of course related, in the sense that China’s increased consumption of iron ore necessarily raises the benchmark price. Speculation as to the future earnings of Fortescue will largely depend on where the above factors are headed in the coming months and years.
Fortescue Metals Group is in an intriguing position. Market tailwinds have conspired to make the company an extremely attractive prospect in the short term, but significant questions remain in the longer term. Prospective investors should carefully consider the future of both steel demand in China, and the iron ore benchmark price, before diving in to Fortescue. If you are bullish on the future of iron ore exports, however, Fortescue presents a strong candidate.
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Motley Fool contributor Tom Clelland has no position in any of the stocks mentioned. 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 Scott Phillips.
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