High Iron Ore Prices Boost Fortescue Metals Shares (ASX:FMG)

Fortescue Metals Group Ltd [ASX:FMG] is slightly down today after going on a run yesterday, mainly because of higher iron ore prices.

Iron ore prices increased 3.1% on Wednesday to a whopping US$136.29, the highest prices in seven years.

What happened?

Brazilian iron ore producer Vale said they’ll be producing less iron ore than expected.

Brazil is one of the main iron ore exporters into China, together with Australia. Australia exports around 80% of the iron ore they produce into China.

Vale is forecasting they will produce 300–305 million tonnes of iron ore this year.

This is the second time Vale has had to revise down their production guidelines. Earlier this year the company had said they were expecting production to be within 340–355 million tonnes. They’ve now lowered their production guideline to 310–330 million tonnes.

Vale has suffered a string of troubles in the last couple of years with a dam collapsing and disruptions from the pandemic. Supply taking a hit has pushed iron ore prices higher.

Strong iron ore prices have also been pushing the Aussie dollar higher against the US dollar.

What could happen next?

Vale expects production to be between 315–335 million tonnes in 2021, which is also lower than previously estimated.

There’s a lot of optimism on the recovery and the vaccine. With lower production than expected from Vale, iron ore prices may remain high for a while, but it will also depend on demand from China and the pandemic.

At time of writing, Fortescue’s shares are trading at $20.56, 13% higher since Wednesday and a whopping 106% up from this time last year. With such a great year, Fortescue so far has paid up $1.76 in dividends, a dividend yield of 8.52%.

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Selva Freigedo

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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