Fortescue Metals Group Ltd [ASX: FMG] shares are down today by 4% at time of writing.
But they’re not the only ones. Iron ore producers, Rio Tinto Ltd [ASX:RIO] and BHP Group Ltd [ASX: BHP], have also seen their share prices drop by over 2% today.
What´s going on?
Iron ore prices are falling as COVID-19 spreads, creating a global economic slowdown.
COVID-19 has already been creating supply disruptions as governments implement social distancing and lockdown countries. A hit to the iron ore supply usually boosts prices.
Last year iron ore prices spiked to over US$120 after a dam burst in Brazil forcing Vale to stop production and affecting global supply.
The problem now, is that demand is also taking a hit, which is absorbing some of the impact and pushing prices down.
The Financial Times reported today:
‘[A]nalysts are growing increasingly concerned about slowing demand in Europe and also China. Over the past week iron ore has fallen 6 per cent to a six-month low of $82 a tonne. Analysts at Citigroup project that prices will fall a further 17 per cent to $70 in the coming weeks.
‘Mr [Luciano] Siani [Vale’s chief financial officer] told analysts that iron ore prices had held up in the first quarter of the year because of a combination of lower production from Australia and Brazil and falling supply from domestic mines in China, which is starting to normalise. Price-supportive supply problems persist, because of lockdowns to prevent the spread of the virus in mining locations. But this is now being offset by lower demand in Europe, South Korea, Japan and the US.’
What happens next for FMG?
In a recent release, Fortescue announced that their mining and processing activity is still in line with their FY20 guidance.
Yet Fortescue’s profits could take a hit if a fall in demand and a global slowdown keep pushing iron ore prices south.
We may have very well seen peak iron ore prices this year already.
Lachlann Tierney from The Rum Rebellion certainly thinks iron ore has entered into a bear market this year. In his report ‘Aussie Iron Ore Crash 2020’, he explains why we could see lower iron ore prices and offers three better resource investments.