The share price of mining giant Fortescue Metals Group Ltd [ASX:FMG] has taken a beating today.
At the time of writing, the FMG share price is down 4.21% or 73 cents to trade at $16.61 per share.
The sharp decline comes just weeks after the 52-week share price high of $19.56, spurred on by a solid FY20 performance.
Fortescue Metals ‘underweight’
Today’s share price action appears to have been caused by a share price downgrade from Morgan Stanley’s equity strategists.
And a weaker iron ore price to boot.
Overnight, the iron ore price fell 3.4% to US$124.20 per tonne.
In a note released by the bank today, Morgan Stanley said pure iron ore plays like FMG and Mineral Resources Ltd [ASX:MIN] are underweight.
Meaning investors should consider holding less pure iron plays as a percentage of their total portfolio.
The bank said its preference is given to Vale SA [NYSE:VALE] and BHP Group Ltd [ASX:BHP] for iron ore exposure.
Though even diversified miners are down today on the weaker iron ore price.
BHP has fallen 0.58% to $37.78 and Rio Tinto Ltd [ASX:RIO] is down 1.92%, sitting at $100.81.
So, what gives?
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Commonwealth Bank’s commodities team says iron ore prices fell amid steel demand concerns in China.
There are concerns that demand from China’s infrastructure and real estate sectors could be faltering.
What’s happening with the price of iron ore?
Iron ore is now trading just above its 2019 peak after climbing out of its March 2020 low.
Source: Trading Economics
So, what’s the likelihood of the price of iron ore sliding back under US$100 a tonne?
Well, it depends who you ask.
Earlier in the year, analysts tipped iron ore to slide below the US$100 mark in July.
That didn’t happen.
In fact, iron ore has been on a steady incline since that time.
It seems that Chinese hunger for steel has contradicted analyst consensus.
To be honest, I am surprised by the pessimistic outlook on iron ore.
Take a look at the graph below.
Source: Trading Economics
This is the Purchasing Managers’ Index (PMI), which measures the performance of the manufacturing sector in China.
Notice the swift recovery from the coronavirus-induced low.
In my books, this points to a positive macroeconomic backdrop for commodity consumption, particularly iron ore and steel.
But you don’t have to take my word for it.
Here’s some evidence.
Source: The Australian Financial Review
Demand from China shows strong signs of continuing.
Investors are pointing to the country’s broad money supply — a strong indicator of economic growth — which, as of August, has risen 10.4% year-on-year.
Meaning, analysts like Morgan Stanley could be wrong to downgrade iron ore producers like FMG.
If they are wrong — and iron ore pushes upwards — that could mean bigger revenue and bigger dividends for FMG. Our editor and market expert Greg Canavan has compiled a list of five Aussie superstars still paying top dividends and which are set to thrive in the post-pandemic era. Claim your free report now.
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