ASX 200 miner Fortescue Metals Group (ASX: FMG) posted a record full-year result last week, reporting a net profit after tax of US$3.2 billion, or an increase of 263% compared to FY18.
While credit is given where credit is due, investors should bring their attention to the iron ore market and spot price, not the company's cyclical profit results.
What were the highlights from Fortescue's FY19 results?
In the company's full year report, it pointed to these contributing factors to its outstanding FY19 revenue.
- Success of the integrated operations and marketing strategy increasing the volume of higher value products
- Increasing demand for Fortescue's products following moderation of steel mill margins and narrowing of price spreads in China from late 2018
- Continued strength in Chinese steel production, growing by 9.9% in the first half of FY19
- Sustained strength in the benchmark iron ore price.
What's happening with the iron ore spot price?
While Fortescue is in a better position to produce higher quality ore with its US$3.875 billion investment to increase the average iron content of its ores, the current market is showing weak demand side fundamentals and depressing spot prices. On Monday, we witnessed a further slide in iron ore spot prices as Chinese iron ore futures fell by approximately 2%.
Chinese steel producers are a major consumer of Fortescue's iron ore and any slow down in steel mill production, regulation or trade war escalation will significantly impact Fortescue's revenue prospects. Even BHP has recently cited that "any further escalation in trade protection or loss of business confidence is a downside risk for consensus views of the world economy, commodity demand and energy and metals prices in the 2020 financial year." The sense of unease will continue to linger, especially when the US is expected to impose yet another tranche of tariffs on Chinese exports on 1 September.
The market is currently looking to reverse higher as President Donald Trump said Beijing requested new China trade talks. However, this is an all too familiar feeling of the market selling off on trade war fears and rallying on resolution 'hints'.
The Fortescue share price is up 3.91% in morning trade, but this week's price action could be another temporary bounce to be followed by further volatility and uncertainty.
Foolish takeaway
Trump has said it was 'possible' he could delay new China tariffs set to kick in 1 September, but unless we see tangible agreements coming out of these US–China trade talks, I believe the negative trend for iron ore markets will continue. Chinese iron ore futures continued falling overnight on Monday, wiping out gains achieved in the previous two trading sessions.
