At time of writing, the share price of Fortescue Metals Group Ltd [ASX:FMG] is down 1.26%, trading at $9.81.
You can see the current FMG share price within the context of the last 12 months of trading below:
As the coronavirus spreads, we look at the implications for the iron ore price and consequently the FMG share price. We conclude that at some point demand for the raw material could collapse, even if Chinese factories return to action.
Iron ore price resilient, FMG share price still well above where it was a year ago
All things considered, the FMG share price is still up significantly.
50% in fact, on where it was last March at the same time.
So in the grand scheme of things it’s proving to be more resistant to the downturn than other shares.
This is because the iron ore price remains remarkably high:
Source: Business Insider
From an early 2016 low, the price of iron ore is up nearly 130%.
We flagged a potential flood of stockpiled steel previously, but today FMG seems to be avoiding the selling pressure dogging much of the market.
Part of this is because workers are slowly returning to the steel mills.
As BHP Chairman Ken MacKenzie stated at recent conference, it’s a two-sided support that’s underneath the iron ore price (via Financial Times):
‘It’s hard for China, for example, to get their workforce out to their mines on the supply side. But on the demand side, because most of the steel mills were on the seaboard [away from the centre of the outbreak], they can actually get the workforce back into the steel mills.’
The problem though, is that what could be really putting a floor underneath iron ore prices is big bets on Chinese stimulus.
Iron ore price propped up by misguided bets on Chinese stimulus
They’ve managed to curtail the virus reasonably well, but will China be able to pump money into the system?
I suspect that further cuts to the Reserve Requirement Ratio (RRR) are in the offing.
But if this health crisis turns into a financial crisis, I have a feeling these big bets that we are seeing on stimulus will unwind as the Chinese financial system feels the strain of a crumbling global system propped up by debt.
Just at the end of December, CNBC quoted Moody’s Chief Economist Mark Zandi as saying: ‘I would point to Chinese corporate debt as the biggest threat [to the global economy].’
This will be the trigger, I believe, for a long-term iron ore bear market.
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