The Fortescue (ASX:FMG) share price hit by broker downgrade

The Fortescue Metals Group Limited (ASX: FMG) share price could start to lag its peers after a leading broker downgraded …

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Fortescue share price Downgrade in ASX share price represented by street sign saying downgrade ahead Hub24 share price

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The Fortescue Metals Group Limited (ASX: FMG) share price could start to lag its peers after a leading broker downgraded its shares.

The downgrade came after the Fortescue share price rallied ahead of other ASX iron ore miners even though it has less reason to.

Sure, confidence in the outlook for the steel making commodity has markedly improved recently. But lower quality ore (58% Fe) is lagging the benchmark pricing (62% Fe), noted Citigroup.

Fortescue share price at premium as discounts widen

Fortescue’s ore is lower quality compared to what BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) produces. But someone forgot to mention that to Fortescue.

“In the last month FMG shares are up 21% in USD terms with peers flat to down and with benchmark iron ore down 7%,”.

“In broad terms, FMG has outperformed the benchmark iron ore price since early July 2021 with risk appetite rising strongly from earlier lows.

“There’s been a clear divergence whereby FMG has outperformed RIO despite a falling ratio of 58%/62% iron ore.”

The discount between the 58% Fe price and 62% Fe price has widened to around 74% compared to 91% just two months ago.

What is the Fortescue share price worth?

Even if you are an iron ore bull, the BHP share price and Rio Tinto share price could offer more bang for your investment buck.

This is the key reason behind Citi’s decision to downgrade the Fortescue share price to neutral from buy.

The broker left its 12-month price target unchanged at $18 a share. That leaves little room for Fortescue to run from Wednesday’s closing price.

Should you buy ASX iron ore shares?

Having said that, Citi believes that the iron ore price is poised for a recovery after the 2022 Chinese New Year (CNY) on 1 February.

“China steel production cuts may persist through to CNY (Oct down 23% on pcp) and we deduce a strong destock cycle is underway,” added the broker.

“However, with China now starting targeted monetary policy easing, we see the increasing likelihood of a strong post CNY recovery in iron ore demand.”

“Furthermore, China mill margins are up with rebar producers now making a healthy US$150/t margin.”

Foolish takeaway

Chinese steel mills are the key customers for Australian iron ore. If they are making big margins, they are more willing to pay more for Australian iron ore.

Against this positive backdrop for the commodity, the Fortescue share price may be spared from a heavy sell-off. The only question is whether it can at least keep up with its bigger rivals.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. 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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