Has the Fortescue Metals Share Price Peaked? (ASX:FMG)

At the time writing the share price of Fortescue Metals Group Ltd [ASX:FMG] is down 4.85%, trading at $11.38.

Today’s drop in share price has wiped away a week’s worth of gains after some positive action in the lead up to the quarterly results released yesterday.

You can see the current FMG share price within the context of the last 12 months of trading below.

FMG peaked in the lead up to the coronavirus pandemic and appears to have just about recovered to its pre-COVID level.

Source: TradingView.com

At the time of the market collapse, I remarked at the resilience of FMG shares — still 50% up from where they were last March.

I called a long-term top on the FMG share price back in February as well.

And now that thesis is beginning to play out.

Iron ore price beginning to lose steam

The bottom panel on the graph shows the futures iron ore price for June (orange) and Australia’s miners index (red).

Together they paint a picture of waning demand for iron and a decrease in activity associated with its extraction.

Source: Business Insider

The price of iron ore is on the decline, evidenced by the graph above — down 10% on the past year.

As we’ve begun to see this health crisis turn into a financial crisis, I have a feeling that even as factories begin to reopen, the iron ore price will continue to faulter.

This is because the Chinese financial system could feel the strain of a crumbling global system propped up by debt.

Leading to what I believe could be a long-term iron ore bear market.

Download your free report to discover why some of Australia’s most popular Mining stocks Could take a Massive Hit in 2020…and What to Buy Instead

COIVD-19 may not be a factor for FGM, but output is

FMG shares jumped 19.7% in April and are up nearly 12% through the first four months of 2020.

In fact, the COVID-19 crisis had little impact on the Australian iron ore market with March quarter reports from Rio Tinto Ltd [ASX:RIO] and BHP Group Ltd [ASX:BHP] confirming high levels of sales.

FMG upgraded its full year guidance for shipments yesterday, citing a 10% increase in tonnage shipped compared to the same quarter last year.

But that does not necessarily equate to higher revenue.

Coming off peak iron ore prices, FGM could see its revenue decrease despite increased output if a bear market emerges.

Increasing output may look good in the short term but flooding an already saturated market could be bad in the long run.

We have previously flagged a potential stockpile of steel.

Chinese stockpiles of steel reinforcement bars have exceeded 12 million tonnes for the first time.

Other players like Rio and BHP have put mining on hold in some locations due the COVID-19 crisis.

But once operations begin again, what will the price of iron look like then?

I suspect it could get worse.

You can learn more about a potential iron ore bear market, and what that means for shares in BHP Group, Rio Tinto Ltd and of course the FMG share price, in this free report.

Kind Regards,

 Lachlann Tierney

The Rum Rebellion

Lachlann Tierney is a writer for The Rum Rebellion and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. 

The Rum Rebellion