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Why Fortescue’s share price surged to its highest since 2008

The Fortescue Metals Group Limited (ASX: FMG) share price surged to hit its highest level since the GFC in 2008 thanks to an upbeat outlook for the iron ore sector.

Shares in the miner jumped 3.5% to $11.80 during lunch time trade – making it the second best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after the Silver Lake Resources Limited. (ASX: SLR) share price, which rallied 9.6% to $1.55.

Fortescue isn’t the only iron ore producer that’s finding favour. The BHP Group Ltd (ASX: BHP) share price increased 1.8% to $41.34 while the Rio Tinto Limited (ASX: RIO) share price added 1.4% to $106.72.

Iron ore looking strong

Further gains in the iron ore price despite the Chinese New Year shutdown is helping to boost sentiment towards the miners ahead of the February reporting season.

The price of the steel making mineral improved by 0.3% to US$94.81 a tonne. This takes its one-year gain to over 27%.

The fact that prices are holding firm even as the Chinese break for the most important holiday of the year gives bulls greater confidence to bid the sector higher.

Go overweight on iron ore miners

December imports of the commodity into China hit 101.3 million tonnes – the second highest level on record and only missing the September 2017 high of 102.8 million tonnes, according to the West Australian.

Optimism towards our iron ore stocks shouldn’t be too big of a surprise. As highlighted previously, the stars are aligning for the sector – at least for the nearer-term.

The global growth outlook is picking up and the three iron ore majors are flushed with cash. This means they could announce another capital return as soon as next month.

The extra cash also provides a reassuring buffer should the iron ore price return some of its stellar gains. You would be hard pressed to find another sector that’s swimming in cash – certainly not the big banks!

Will the iron ore price fall in 2020?

However, some naysayers believe the iron ore price will retreat later this year. Fresh supply from the restarting of mines shuttered in the wake of the tragic tailings dam disaster in Brazil could temper gains.

But the rate of the production recovery is not guaranteed and major economies like China are stepping up their infrastructure building projects to offset waning growth.

China posted its weakest reading in 29 years when its gross domestic product (GDP) slowed to 6.1% in 2019.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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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