Down 6% in a week. Are Fortescue shares carrying an iron anchor?

The iron ore miner has dipped, what's going on?

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The Fortescue Ltd (ASX: FMG) share price has dropped over 6% in the past week, as shown on the chart below. Market sentiment about the ASX iron ore share is usually influenced by the commodity price, which appears to be the cause right now.

Demand for iron ore is largely driven by China because of how much of the commodity the Asian superpower purchases. When demand in China weakens, it can lead to a decline for the iron ore price.

The most recent data from China has not been encouraging.

Weak Chinese demand

According to reporting by The Australian, Singapore iron ore futures dropped 3.5% to a near six-week low of US$111.45 per tonne after China's monthly manufacturing PMI (purchasing managers' index) for May dropped back to a level that indicates "contraction", suggesting a weak Chinese outlook.

There has been a rapid decline in iron ore futures; on Thursday, the price reached a three-month high of US$123 per tonne.

The Australian also reported that the value of new home sales in China from the 100 biggest real estate companies showed a 34% year-over-year decline in May. It was also reported that the level of iron ore inventory at China's ports reached a two-year high.

Chinese officials recently reiterated the country's stance on continuing to control crude steel output in 2024, according to reporting by Mining.com. China is aiming to reduce its level of carbon dioxide emissions by 1% compared to 2023's national total.

China is planning to strengthen its control over steel output and capacity. Analysts from Sinosteel Futures were quoted by Mining.com, who said:

It remains unclear whether steel output this year will be flat on year or be lowered; such details are worth monitoring further.

Is there any positivity for the iron ore price and Fortescue shares?

Some analysts are optimistic about where the iron ore price can go from here.

Global bank HSBC's chief economist Paul Bloxham believes there could be a surge in demand that will support the iron ore price and keep it relatively high for the next 12 months, according to reporting by the ABC.

Bloxham suggests the iron ore ice will average US$105 per tonne in 2025, which is stronger than what other analysts are forecasting. Goldman Sachs thinks it could be US$95 per tonne in 2025.

While there is weakness in the Chinese real estate market, HSBC suggests an increase in renewable energy manufacturing in China and globally can compensate for any shortfall. The US Inflation Reduction Act funding could indirectly help boost iron ore demand. Bloxham said:

It's a big policy measure there that has been taken to support investing in capacity to make the energy transition.

It's happening in Europe, it's happening in Japan. Australia of course has followed as well to support our energy transition.

That's driving a lot of the demand for the increase in the products that go into electric vehicles, solar panels, batteries, and wind farm equipment.

Fortescue share price

When the iron ore price falls, Fortescue receives less revenue for the same amount of production but pays the same amount for the mining costs. This hurts its net profit after tax (NPAT).

That's why a lower iron ore price is bad news for the Fortescue share price, which is down 15% since the start of 2024.

Motley Fool contributor Tristan Harrison has positions in Fortescue. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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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