Fortescue Metals Group Limited (ASX: FMG) managed to forge a reputation as a winning share in 2020. So much so that many investors would probably call 2020 one of the best years ever for the Fortescue share price. The numbers do back this up.
Fortescue shares managed to deliver an annual return of a whopping 115% after rising from $10.75 in January to over $23 by the end of December. Further, based on the current Fortescue share price, the company has a trailing dividend yield of 7.95% from 2020's efforts.
And yet, Fortescue has had a pretty rough start to the year. Over the month of January 2021, Fortescue shares fell around 12%. Yes, the mining giant started the year at a price of $24.80, but closed last Friday 29 January at just $21.83.
So why has the Fortescue share price gotten off to a shaky start this year? Even after the company gave a pretty well-received quarterly update last week?
Fortescue pays the iron price
Two things haven't gone Fortescue's way in 2021 – the iron ore price and the Aussie dollar. Those two key metrics do more to define Fortescue's profitability than almost anything else (apart from how much iron the company sells of course).
Iron ore had a spectacular start to the year, to be sure. According to reporting in the Australian Financial Review, iron ore reached a price of US$172.36 per tonne in mid-January, its highest level in almost a decade. But over the rest of the month, iron ore has slid from these heights and finished up the month around US$155 per tonne.
That's still a historically high price to be sure. But investors sometimes tend to get a bit carried away with what the future holds when a commodity hits a new high. So perhaps we can say that the Fortescue share price was just coming off the boil in January after a frenetic year.
The Aussie dollar hasn't helped either. As with most commodities, iron ore is priced in US dollars in international markets, meaning that profits have to be converted back to Aussie dollars when Fortescue reports them. As such, a rising Aussie dollar is not good news for Fortescue's profits.
The Aussie has been trending upward for a few months now. And meanwhile, the iron ore price had been doing the same thing. But even after the iron ore price came back to earth, the Aussie was still buying around 76 to 78 US cents, its highest level since 2018.
Both of these factors have likely blunted the company's returns (at least in the short term), and thus might have been a factor in investors getting cold feet over the Fortescue share price.
