Fortescue (ASX:FMG) share price bounces despite looming iron ore supply outlook

Fitch Solutions is forecasting a jump in global iron ore production in the next couple of years …

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The Fortescue Metals Group Ltd (ASX: FMG) share price is bouncing back this week after the company released its FY21 full-year result.

The iron ore major reported a 74% increase in total revenue to US$22.3 billion and a 117% surge in net profit after tax (NPAT) to US$10.3 billion. The strong result was underpinned by a period of sky-high iron ore prices, where Fortescue received an average realised price of US$135/dry metric tonne (dmt) compared to US$79/dmt a year ago.

The Fortescue share price rallied 6.6% on Monday to $21.32 and is largely holding its gains in Tuesday's session, slipping back 0.52% to $21.21 at the time of writing.

While Fortescue shareholders can finally breathe a sigh of relief after a brutal month, Fitch Solutions believes an acceleration in global iron ore production is on the horizon.

Female miner standing next to a haul truck in a large mining operation.

Image source: Getty Images

Global iron ore production to accelerate

According to an article featured on Mining.com, analysts at Fitch Solutions forecast an acceleration in global iron ore production in the coming years.

"Global iron ore production growth will accelerate in the coming years, bringing an end to the stagnation that has persisted since iron ore prices hit a decade-low average of US$55.0/tonne in 2015."

"We forecast global mine output growth to average 3.6% over 2021-2025 compared to -2.3% over the previous five years. This would lift annual production by 571mn tonnes in 2025 compared to 2020 levels, roughly the equivalent of India and Brazil's combined 2020 output," says Fitch.

The research firm pointed at Brazil and Australia as the main drivers of supply growth.

Fitch believes Brazil's iron ore production growth will rebound in the coming years following a sharp contraction and stagnation between 2018 and 2020. Vale's Brumadinho damn collapse in 2018 sparked a number of investigations into one of the world's largest iron ore producers, Vale.

The disaster saw multiple operations come to a standstill and a heightened level of regulatory scrutiny in what Fitch described as "the deadliest environmental disaster in the nation's history".

Fitch forecasts Brazil's iron ore production to increase at an annual average growth rate of 10.6% between 2021 and 2025.

The BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Fortescue share price topped at the beginning of August following weaker steel demand from China. Despite the recent collapse of ASX-listed ore miners, Fitch believes that the big three will re-invest "currently buoyant profit into additional production", further supporting its narrative of an accelerating near-term iron ore output.

Looking beyond 2025, Fitch expects that "lower prices will eventually drag on production rates. We forecast annual production growth to average just 1.1% over 2026-2030, with output levels stagnating by the end of the decade".

Fortescue share price snapshot

Despite Monday's bounce, the Fortescue share price is still well in the red for 2021, down 13.75% year-to-date.

A mammoth dividend is on the horizon for Fortescue shares, with an ex-dividend date of Monday, 6 September for a final dividend of $2.11.

At today's prices, the final dividend alone is worth a yield of 9.9%.

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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