The Fortescue share price is down 8% in May. Is now the time to buy?

What’s dragging Fortescue shares lower?

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Key points

  • Fortescue shares are down 8% since the start of the month 
  • China's worsening COVID-19 situation has put iron ore prices in a tailspin 
  • Fortescue recently reaffirmed its upgraded shipping guidance but forecasted slightly higher C1 costs 

The Fortescue Metals Group Limited (ASX: FMG) share price has fallen on difficult times recently.

The world’s fourth largest iron ore miner’s shares have come under pressure amid the plunging price for the steel-making ingredient.

At Wednesday’s market close, Fortescue shares ended the day 2.38% lower to $20.12. This means that its shares are now down 8% for the past three trading days.

What’s going on with iron ore prices?

The drop of iron ore prices over the past week is providing a strong resistance to the resources industry.

As COVID-19 continues to spread throughout China, there are fears that the government may enforce a wider lockdown.

Iron ore prices have sunk almost 5% since this time last Wednesday to trade at US$144.08 per tonne.

It is expected that there will be a reduction in demand from Chinese steel mills in the next few months. This is because the construction sector has been heavily affected by the government’s strict zero-COVID policy.

The property and infrastructure industry makes up roughly 60% of China’s steel needs.

What does this mean for Fortescue?

The sharp decrease will no doubt have an impact on Fortescue’s bottom line; however, profits are still expected to be churned out.

In its March quarterly trading update, Fortescue reported record year to date iron ore shipments of 46.5 million tonnes. Coupled with its industry-leading C1 costs of US$15.78 per wet metric tonne, this still translates to bumper profits.

The company is forecasting an upgraded shipments guidance of 185 million tonnes to 188 million tonnes for FY22.

C1 costs are expected to slightly rise between US$15.75 and US$16 per wet metric tonne due to inflationary costs.

Only time will tell if Fortescue can achieve the above guidance, despite its strong dependence on the Chinese market. If it does miss the mark however, then its shares could tumble significantly further.

What do the brokers think?

Following the trading update, a couple of brokers rated the company’s shares with varying price points.

The team at UBS raised its 12-month price target by 9.4% to $18.70 for Fortescue shares.

However, Goldman Sachs had a more bearish tone, slashing its rating by 2% to $14.90 apiece. Based on the current share price, this implies a potential downside of almost 26% for investors.

Fortescue share price summary

It has been a rollercoaster ride for Fortescue investors, with its shares reaching all-time highs before sinking near 52-week lows.

Over the last 12 months, the company’s share price is down 11%, with year to date up almost 5%.

Fortescue has a market capitalisation of around $61.95 billion and approximately 3.08 billion shares on its books.

Motley Fool contributor Aaron Teboneras 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 Scott Phillips.

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