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Top broker warns of no happy 2019 ending for Fortescue’s share price

The Fortescue Metals Group Limited (ASX: FMG) share price is underperforming today and Morgan Stanley warns that the stock may keep falling over the next two months.

That won’t be a good way for any ASX share to end 2019, if the broker is right, and Fortescue’s 0.6% decline to $9.74 in after lunch trade doesn’t bode well for the iron ore miner.

In contrast, the BHP Group Ltd (ASX: BHP) share price jumped 0.5% to $38.54 and the Rio Tinto Limited (ASX: RIO) share price added 0.6% to $97.53, while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained 0.2% at the time of writing.

Reports that US and China are inching towards a first phase trade deal is lifting sentiment towards equities and industrial commodities.

Christmas blues

But the pre-Christmas cheer is eluding Fortescue today and Morgan Stanley believes there is a 60% to 70% chance that the FMG share price will continue to fall over the next 60 days.

“This is because the stock has traded up recently, making short term valuation much less compelling,” said the broker.

“While iron ore is now trading in line with our forecasts (Spot US$90/t, MSe Dec’19 US$90/t), we expect the price to fall next year (MSe US$90/t in Mar’20 to US$70/t in Dec’20). At spot, FMG is currently pricing in an iron ore price of ~US$85/t, ~40% higher than our long-term price estimate of US$60/t.”

Morgan Stanley rates Fortescue as “underweight” (meaning “sell”) with a price target of $7.85 a share.

Is iron ore heading lower in 2020?

The iron ore price is currently fetching around US$85 a tonne. Some commodity analysts think it’s heading lower because demand for the steel-making mineral is waning as global growth slows. A trade war truce between the world’s two largest economies is unlikely to reverse this.

What’s more, iron ore supplies are expected to increase from 2020 onwards as Vale resumes export from some of its shuttered mines following the tragic dam disaster in Brazil.

Foolish takeaway

While I am not as pessimistic about the outlook for iron ore, I prefer BHP and Rio Tinto over Fortescue as they have higher quality assets and stronger balance sheets.

I also think Fortescue’s share price overshot on the upside. It surged around 150% over the past 12-months when our two biggest iron ore producers gained between 26% and 36% over the period.

I suspect the gap between Fortescue and its larger peers will close in 2020.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

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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