The Fortescue Metals Group Limited (ASX: FMG) share price has been suffering in recent times. Over the past week, Fortescue shares have dropped 13%.
As one of the world's biggest iron ore miners, the ASX mining share is highly dependent on what happens in iron ore for its revenue and net profit after tax (NPAT).
Weakness in the iron ore price is not good news for Fortescue. So what happened on Friday to see the Fortescue share price drop 2.5%? Let's take a look.
What happened?
On Friday, investors reacted to the news that the iron ore price had taken a dive. According to Commsec, mining stocks dropped around 10% last week, which was the biggest loss since March 2020 – the period of time of the worst of the COVID-19 crash.
The cause of the iron ore price decline, according to Commsec, was:
Iron ore futures slid US$8.37 or 8.0% to US$96.39 a tonne after the lockdown of Chengdu revived fears that the virus will continue to hamper China's economic recovery.
For readers that need a refresher on Chinese cities, Chengdu is a large city with more than 20 million people, all of whom have been ordered to stay inside. According to reporting by the BBC, only one person per household is allowed to go out for essential shopping.
Reportedly, there were 157 new infections on Thursday. People are now not allowed to leave or enter the city. They can only go out to buy essentials if they have evidence of a negative COVID-19 test. The BBC also wrote:
Beijing's drive to ensure "zero Covid" has been accused of stifling economic growth, and has prompted rare public dissent from citizens.
It's the impact on the Chinese economy that investors are focused on, considering China is such a huge buyer of iron ore. Therefore, what happens in China can have a huge impact on the iron ore price and the Fortescue share price.
Fortescue's view on the Chinese economy
The Australian Financial Review has reported on data showing that initiatives by China to get its economy back on track may not be going to play. It said:
The Caixin Manufacturing Purchasing Managers' Index fell to 49.5 last month from 50.4 in July, just below economist expectations for a reading of 50, the mark that separates growth from contraction.
But Fortescue leader Andrew Forrest is not put off by the weakening numbers coming out of the Asian superpower. Forrest told the AFR:
Europe and North America would be holding parties and celebrating if they could get 5.5% GDP growth, let's not forget that.
And China has so many more levers it can yet pull. It's not run by a bunch of ideologues, the economy is run by people who are leading in their game. I have to admit I've built a business through listening very carefully to what that leadership has said it's going to do, because…their futures, their careers, their leadership rests on their economic management.
I've been able to rely on that – and I think we [still] can.
Time will tell whether Forrest is right to be positive about China and what the flow-on effect on iron and the Fortescue share price will be.
