Iron ore has zoomed from hero to zero and it’s the Fortescue share price that may have most to lose.
The post Fortescue (ASX:FMG) share price under most pressure as iron ore crashes to bear market appeared first on The Motley Fool Australia. –
The iron ore price tumbled into bear market territory and it’s the Fortescue Metals Group Limited (ASX: FMG) share price that’s feeling most of the heat.
The price of the steel making mineral plunged 7.4% to US$181.57 a tonne on Friday, reported the Australian Financial Review.
This puts it firmly in a bear market as it has fallen 23.5% from its record high in May of US$237.57 a tonne. The technical definition of a bear market is a peak-to-trough fall of 20% or more.
Iron ore bear market mauls Fortescue and friends
This is why the ASX iron ore majors are underperforming today. The Fortescue share price lost 2.1% to $24.40 at the time of writing.
In contrast, the S&P/ASX 200 Index (Index:^AXJO) jumped 1.4% to a new record high of 7,492 points ahead of the close.
The sell-off in the Fortescue share price comes even as the miner is speculated to declare a bumper dividend this month.
Why the Fortescue share price is worse affected
Fortescue is regarded as the marginal player among the majors as its earnings are more leveraged to the iron ore price. This is one reason why it’s lagging the group.
Another reason is the risk that its lower quality iron ore export will decline more than higher purity ore from its bigger brothers.
The latest sell-off in the commodity is driven by China’s campaign to limit steel production to curb emissions.
Chinese steel output finally falling
The Chinese government had limited success in persuading its steel mills from cutting production. But its persistence may be paying off.
While steel output climbed 12% in the first half of calendar 2021, the AFR quoted Bloomberg as saying that the daily crude-steel output at major mills fell 5.6% in the first 10 days of July from June. This followed a drop a similar decline in June.
“The world’s fourth-largest steel producer, Shagang Group, said last week that it would curtail production and overseas sales to comply with government efforts to cut emissions,” said the AFR.
“Additionally, Chinese steel mills have reportedly resold contracted iron ore volume back to the market, according to S&P Global Platts.”
Volatility hangs over Fortescue share price
If Chinese steel producers are going to limit output, they may favour higher quality ore over what Fortescue sells.
This is because higher grade ore requires less coking coal. The price of coal has also surged along with most commodities, so it could be more economical for mills to use iron ore with less impurities.
However, experts warn that we won’t know for sure until the price volatility afflicting the commodity market subsides.
And that could take weeks.
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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.