Just how dependent is Fortescue Metals (ASX:FMG) on China?

To what extent can China impact Fortescue?

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A tumbling iron ore price has weighed on the Fortescue Metals Group Limited (ASX: FMG) share price in recent weeks. Waning China imports for the metallic material have sent the commodity’s price downwards from ~US$220 per tonne to a current price of US$160.54.

Similarly, shares in Fortescue have taken a ride to the downside to the tune of 24% over the course of a few weeks. Analysts have warned that the downward trend for iron prices might continue as China experiences a softening in its economic rebound.

So, what level of exposure does Fortescue Metals Group have to the world’s largest iron ore importer? Let’s take a closer look.

China’s hand in Fortescue’s ASX success

Much like Australia’s export relationship with China more broadly, Fortescue can be at the peril of its import partners. Unfortunately for shareholders, China’s directive to reduce emissions by cutting steel output has been a blow to the Aussie company.

Last year, China’s insatiable iron ore demand helped the Fortescue share price cement a 118% gain. Meanwhile, this year hasn’t been as peachy for the mining giant as the country’s imports slim down.

The question is, how reliant is ASX-listed Fortescue on China for its iron ore exports and revenue? While current values are not available, we can look at a few historical metrics to gain a sense of the country’s impact.

According to Statista, China accounted for roughly 75% of global iron ore imports based on the value in 2020. Luckily for Australia, the lion’s share of those imports is sourced from the land of green and gold – with 60% of China’s iron ore coming from Australia.

However, as the People’s Republic steel production ramped up over the past year, so did the demand for iron ore. It is likely China’s share of the import pie has only grown larger in 2021.

Furthermore, The AFR has quoted that 94.5% of Fortescue’s revenue was derived from China last year. The company’s more recent reliance will become clearer after it releases its FY21 full-year results next week.

Though, Fortescue is not alone in its reliance on China when it comes to iron ore exports. Late last year, CEO Elizabeth Gaines stated, “[China] accounted for 87 per cent of all iron ore exported from Australia in financial year 2020.”

June quarterly production report

At the end of July, ASX-listed Fortescue reported record iron ore shipments of 49.3 million tonnes for the quarter. This brought the financial year total to 182.2 million tonnes. Additionally, the average revenue per dry tonne came to US$168, representing a gross margin of roughly 84%.

Unfortunately for us, the update didn’t indicate what percentage of those exports were China-bound. Recently, Gaines said, “Australia must not lose sight of its trade relationship with China.” If those comments are anything to go by, it is likely still a large portion.

Finally, while a correction in iron ore prices had been anticipated by analysts following China’s steel mill restrictions, the ferocity at which it fell left some shocked. For instance, senior commodity strategist at ANZ Daniel Hynes said, “This move goes against the Chinese data we’ve seen so far. While soft, it doesn’t warrant this reaction in prices.”

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Motley Fool contributor Mitchell Lawler 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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