Why the Fortescue (ASX:FMG) share price has plunged 6% to a 5-month low

Iron ore prices have retreated back to March levels, dragging the Fortescue share price with it.

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The Fortescue Metals Group Limited (ASX: FMG) share price has continued to tumble, down 6.11% to $20.14 at market close on Thursday.

Shares in the iron ore major have lost almost a quarter in value since its record $26.50 open just a few weeks ago on 29 July.

Iron ore and the Fortescue share price slide to 5-month lows

Iron ore spot prices have slumped to their lowest since March, in line with how Fortescue shares have been performing.

Chinese production mandates on its steel industry in efforts to curb output and reduce emissions has led to a dent in the iron ore market.

According to Mining.com, “Iron ore inventories at 45 ports in China increased by 260,000 tonnes last week to 127 million tonnes, data from Mysteel consultancy showed”, signalling that supply is outstripping demand.

It also flagged that with the Chinese Government “stepping up steel output cuts, iron ore could face increasing pressure”.

According to Market Index, iron ore prices closed at US$159.59/tonne on Wednesday, a 1-month decline of almost 30%.

Fortescue results are around the corner

Fortescue’s FY21 full year results are expected to land on Monday, 30 August.

Unfortunately, the post-earnings performance of peers such as BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) aren’t very reassuring.

In the case of Rio Tinto, its shares have tumbled 21% since the miner released its half-year results on 28 July.

The market appeared to be uninterested in its outstanding financial performance which included a 156% jump in underlying earnings to US$12.2 million, a 143% increase in interim dividend to $3.76 per share as well as a special fully franked special dividend of US$1.85 per share.

Foolish takeaway

Iron ore prices have surged from approximately US$80/tonne in early 2020 to record highs of US$230/tonne in May this year.

Surging prices have helped the Fortescue share price deliver a triple-digit return in 2020, whilst maintaining a generous double-digit dividend yield.

However, as iron ore prices continue to fall, investors may need to prepare for change.

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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.

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