The Fortescue Metals Group Limited (ASX: FMG) share price is on a great run, up 25% since 10 November. It's trading more than 6.5% higher today.
After such a strong run, can the iron ore ASX share keep the good times rolling?
Fortescue shares haven't been much higher than the current level for most of the past 12 months. This comes at a time when the iron ore price isn't anywhere near as high as it was earlier in the year – when it was above US$150 per tonne.
What's the outlook for Fortescue shares?
The company generates almost all of its revenue from iron ore, so the performance of that commodity is key for its profitability.
China is the major buyer of Fortescue's iron ore, so what's going on in the country can have a key influence on the company's fortunes.
The Asian superpower has been battling COVID lockdowns and restrictions for a long time, which has reduced economic activity and growth. However, there are signs that China is lightening its COVID rules.
A number of cities have recently eased some rules. For example, from this week, people will no longer need a negative COVID test to take public transport and visit parks. The latest easing, according to reporting by Reuters, is in Urumqi – the capital of the Xinjiang region. It has reportedly seen lockdowns for months but will reopen malls, markets, restaurants and other venues this week.
If the country continues toward ending COVID restrictions, this could be a useful boost for demand for iron, steel and the rest of the economy.
Fortescue's current profitability is higher now, thanks to a stronger iron ore price.
Broker ratings
Despite promising developments in China, brokers are largely pessimistic about where the Fortescue share price is headed from here. A price target suggests where the Fortescue share price may be in 12 months from now.
Macquarie has an 'underperform' rating on the iron ore miner, with a price target of just $14.50. That implies a possible fall of around 30%, though the iron ore price is beating its conservative estimates for FY23.
The broker expects Fortescue to cut its dividend payout ratio so that cash can be redirected to capital expenditure. Macquarie is predicting a grossed-up dividend yield of only 6.5% from the company in FY23.
Citi rates Fortescue as a sell, with a Fortescue share price target of just $16.70. That suggests a drop of almost 20%. It's concerned about elevated operating costs for the new Iron Bridge project as it builds up to full production.
