Why the Fortescue (ASX:FMG) share price has fallen off a cliff

From record highs last week to a sudden 10% selloff. What happened to Fortescue shares?

| More on:
A stockmarket chart on a red background with an arrow going down, indicating falling share price

Image source: getty Images

The Fortescue Metals Group Limited (ASX: FMG) share price is continuing its losing spree, down another 1.68% to $23.98 on Tuesday.

Unfortunately, shares in the iron ore major have tumbled 9.55% in the last three trading sessions, despite a record close of $26.50 last Thursday.

Why the Fortescue share price nose dived from record highs

A sharp fall in iron ore spot prices

Iron ore prices have dived from record levels in recent days, following China’s moves to reduce steel output to reduce its carbon emissions.

The all important iron ore spot price has tumbled from ~US$210/tonne last week, to a 2-month low of ~US$181.

Mining.com reported that China has asked its steel producers to limit this year’s production to no more than 2020 levels. However, production grew nearly 12% in the first half of 2021, meaning a significant cut is required in the second half.

“Shagang Group, the world’s fourth-largest steel mill, said this week that it’s curtailing production and overseas sales to comply with government efforts to cut emissions.”

“That is raising expectations that activity will need to be restricted significantly through the end of the year. At the same time, China has unveiled more measures to curb overseas shipments, with the aim of using lower exports and inventories to offset supply shortfalls.”

The sudden 17% slide in iron ore prices and anticipation that Chinese demand may soften in the second half is driving recent volatility in the Fortescue share price.

Weak Chinese manufacturing figures

China’s Caixin purchasing managers index (PMI) figures, a private gauge of the country’s manufacturing activity, could be another factor weighing on the Fortescue share price.

On Monday, it was reported that PMI figures fell to 50.3 in July, the lowest level since May 2020.

According to MarketWatch, China’s manufacturing activity has struggled to pick as “heavy floods, a resurgence of COVID cases and power shortages in some cities weighed on output and new orders”.

Diversification paying dividends

Diversified miners such as BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have held up relatively well in wake of lower iron ore prices, down just 2.25% and 3% respectively in the last three trading sessions.

However, pure play iron ore miners including Mount Gibson Iron Limited (ASX: MGX) and Champion Iron Ltd (ASX: CIA) were quick to sell off, falling a respective 5.58% and 5.83% this week.

Fortescue share price snapshot

The Fortescue share price has unfortunately entered negative year-to-date territory, down 3.43% in 2021.

This compares to its peers such as BHP and Rio Tinto which have lifted a respective 22.62% and 14.26% year-to-date.

Should you invest $1,000 in Fortescue right now?

Before you consider Fortescue, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Fortescue wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Fallers