Why Fortescue Metals Spiralled Down 7% Today

Fortescue Metals Group Ltd [ASX:FMG] tumbled down 7.7% to a low of $5.42 this morning. It seems like the iron ore miner’s share price edges lower on a daily basis.

The group is now down 6.3% year-to-date and 23.4% from its 2017 high of $7.17 in February.

What happened to the Fortescue share price?

The iron ore price fell 8.5% overnight. The drop is likely due to the lack of buyers, accelerating the commodities downturn. The iron ore spot price is now sitting around $US68.04 a tonne, which is a loss of 28% from its high in February of US$94.86.

According to the Australian Financial Review:

buyers are pulling back, opting to tap either their own stockpiles or those already at Chinese ports, anticipating prices to fall still lower.

The spot price is widely forecast to slide towards the $US55 mark as this year progresses, and to hold near that level through 2018.

“Our outlook for the second half remains relatively bearish, with third-quarter forecast at $US60,” Goldman Sachs analyst Jeffrey Currie wrote in a new report.

It should come as no surprise that, as iron ore falls, FMG’s share price follows. The miner depends on the price of iron ore to make their margins. When the price of iron ore is low for sustained periods, FMG’s profits are affected.

What now for FMG shares?

This is the trouble with investing in companies with profits tied to volatile commodities. It’s why many investors choose to invest in stocks which are tied to a stable commodity that follows inflation. An example could be Coca Cola [NYSE:CO]. The price of coke isn’t volatile.

If you buy a can of coke for $2.50 today, you can be confident it will be $2.50 tomorrow. Over the years, the price will rise in line with inflation. It’s just one of the reasons why the greatest investor in history, Warren Buffett, bought such a large holding in Coke.

When it comes to iron ore miners like FMG, I suggest you sit on the sidelines for now. As iron ore continues to run down, investors could likely push iron ore stocks down further.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

PS: If you want to lay down a little money on the hottest corner of the ASX right nowbut you dont know your way around the small-cap sectorthis report is for you. Get access now (free).


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