The Fortescue Ltd (ASX: FMG) share price has plunged by approximately 40% over the past six months, as shown in the chart below. While some investors may be fleeing the ASX mining share, others are viewing it as an opportunity.
The ASX iron ore share is heavily exposed to the volatility of the iron ore price, so the recent decline to below US$100 per tonne was another negative to hit confidence about the industry.
Trading Economics reported that poor demand for steel in China led steel mills to cut their iron ore purchases. The weak demand was caused by "China's housing oversupply crisis and the government's lack of stimulus measures toward debt-ridden property developers".
According to Trading Economics, output data showed that steel production in the country dropped by 9% in July compared to June, "limiting the outlook of iron ore input purchases by blast furnaces." Iron ore portside inventories in China continued to rise in July "despite seasonal forces encouraging draws".
It was also pointed out by Trading Economics that some economies have raised trade barriers to "prevent Chinese dumping."
Why Fortescue shares could be an opportunity
According to reporting by the Australian Financial Review, brokers and Ellerston Capital's Chris Kourtis are becoming bullish about the ASX iron ore share.
The AFR noted that institutions including Citi, JPMorgan and Morgans have increased their rating on the mining business.
Ellerston Capital recently revealed it had decided to sell BHP Group Ltd (ASX: BHP) shares and buy Fortescue shares. Kourtis said:
Following the sharp derating, we believe FMG now offers a compelling entry point at current bombed-out levels.
Negative sentiment around sluggish but flat Chinese steel demand, elevated China port inventory and an improving iron ore supply outlook from West Africa have
weighed on the big three Australian iron ore producers.However, we believe the valuation buffer now accounts for much of the risk to spot prices moving below $US100 a tonne.
Citi turned positive on the business, though the broker acknowledged its pure commodity exposure to iron ore had "proved problematic." Analysts at the broker decided to turn positive on the company because of its cheaper valuation. Analysts at Citi said, according to the AFR:
[We] upgrade to buy given the depth of the valuation discount rather than our still cautious iron ore view.
Market capitalisation snapshot
Over the last 12 months, the Fortescue share price has dropped by approximately 16%, putting its market capitalisation at $52.88 billion, according to the ASX.
