The Fortescue Metals Group Limited (ASX: FMG) share price has performed strongly since the end of October, up 46%. Could it keep rising from here?
In the short term, there is no doubt that the company's fortunes will be dictated by the performance of the iron ore price.
China plays a key part in the demand for iron ore, so what happens there could have a big impact on the ASX iron ore share's performance in 2023.
Iron ore prices to strengthen?
The investment bank Goldman Sachs recently increased its prediction for the iron ore price for 2023 to US$120 per tonne, up from US$100 per tonne. The three-month expectation is US$150 per tonne.
It suggested that there could be a large deficit of 43 million tonnes for the iron seaborne market in the first half of 2023 with "lower seasonal supply from Australia and Brazil and an expected recovery of Chinese steel volumes."
Goldman Sachs also said there is an ongoing recovery for Chinese property sales and an increase in Chinese blast furnace utilisation, steel production and rebar prices.
Chinese steel mills reportedly have their lowest inventories since 2016.
Don't forget how strongly western economies bounced back after the end of COVID-19 lockdowns. I think something positive could happen for China as well.
Commsec numbers suggest that Fortescue could generate $2.28 of earnings per share (EPS) in FY23 while paying a fully franked dividend per share of $1.56. That translates into a grossed-up dividend yield of 10.4%.
While Fortescue can't control iron ore prices, I think its iron operations outlook looks positive with the ramping-up of the Iron Bridge project, the prospect of it being able to sell a (higher priced?) green iron product thanks to its decarbonisation efforts, and expansion into iron ore mining in Africa.
Green energy could drive value
For me, the thing that could drive a sustained increase in the Fortescue share price is the green energy side of the business.
This is a wide-reaching division that aims to do a number of things to help the world decarbonise, including the production of green hydrogen, green ammonia and high-performance batteries.
Fortescue has plans to produce 15 million tonnes of green hydrogen per annum by 2030, with European energy giant E.ON committing to buy a third of production by 2030.
The business is working on a global portfolio of potential green energy projects. It's pursuing possible locations in Canada, the US, New Zealand, Australia, Europe, Egypt, the Kingdom of Jordan, Brazil and so on.
It could be some time before Fortescue Future Industries (FFI) makes meaningful earnings. However, it seems the global decarbonisation shift by many countries is just gaining steam, which is a huge opportunity for the businesses involved in providing the technology and energy to do that.
I think the Fortescue share price and dividends can deliver good wealth-building returns from here if it executes well on the green energy plans. But, I would prefer to buy Fortescue shares under $18.
