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FMG Shares: Guide to Trading Fortescue Metals Group Shares


FMG Shares: Guide to Trading Fortescue Metals Group Shares

FMG Shares: Guide to Trading Fortescue Metals Group Shares

Vantage Updated Updated Mon, November 20 02:36

Fortescue Metals Group (FMG) was founded in 2003 in Western Australia and is one of the world’s lowest cost iron ore producers. FMG has delivered over 1.7 billion tonnes of iron ore to its customers since its inception and is currently shipping at an annual rate of over 180 million tonnes.  

The firm is a major supplier of seaborne iron ore to China and has recently expanded into other markets including Japan and South Korea. The rapid growth of the Chinese economy has been one of the main drivers behind FMG’s meteoric rise over the last two decades, with the share price surging from just 2 cents a share back in 2003 to a peak of $24.91 a share in July of 2021. A whopping 390,000% increase in just under 20 years!  

However, a dramatic slowdown in economic activity in China has seen the price of FMG topple 40% from its peak to trade, at the time of writing, at $15.94. Does this present a great buying opportunity for investors or is there further downside for the iron ore producer in the months ahead?  

To answer this question, we must first get an understanding of the cyclical drivers of iron ore prices and the long-term outlook for the mining industry as a whole.  

What is Iron Ore? 

fmg shares

Iron ores are rocks and minerals from which metallic iron can be extracted. Virtually all iron ore that is mined – upwards of 98% – is converted into pig iron for steel making which is then used in construction, transportation, energy infrastructure and household appliances.  

A vast majority of the iron ore that is mined globally is imported by China, and it is therefore unsurprising that the health of the local property market and the rate of economic growth in the world’s second largest economy is a key driver of the price of the metallic ore. In 2021, China imported $173.6 billion of iron ore, accounting for over 70% of total global imported iron ore. This is a gargantuan amount more than second on the list Japan, which spent on $18 billion on iron ore imports.  

More importantly for potential FMG investors is that of the $173.6 billion China spent on iron ore, $105.7 billion was on ore imported from Australia. Making FMG a prime beneficiary of an increase in imports from Australia’s largest trading partner.  

FMG (Orange) Positive Correlation to Iron Ore Prices (Blue)  

Fmg shares


Why Invest in the Mining Sector? 

The mining industry is a sector that can provide investors with great opportunities for returns for a vast array of reasons. First and foremost, mining is necessary to provide the world with much needed resources for a variety of different functions, from construction of buildings and the production of household appliances, to manufacturing vehicles for transport and building the infrastructure needed to transition to a fossil-free future.  

Secondly, mining is a well-established industry with a history stretching back thousands of years. This provides traders and investors with trends and patterns to base future investment decisions on and is why the industry is often referred to as cyclical in nature.  

Finally, there is a finite supply of the minerals that is mined by these companies. Meaning as demand increases and supply decreases, the prices of these commodities should continue to appreciate.  

How FMG Has Performed in 2022 and Why  

As touched on briefly above, Fortescue metals’ share price has traded quite significantly lower from the peak it set in the middle of last year, as the rate of economic activity in China slowed dramatically amid authorities’ pursuit of a strict Covid-zero policy. Youth unemployment has soared above 20% on the mainland, exports have dropped significantly and the IMF and World Bank estimate that consistent lockdowns and the imposition of strict restrictions will shave a full point off China’s 2022 growth target.  

Unsurprisingly, the trajectory of FMG’s share price has mirrored the health of the Chinese manufacturing sector. It is yet to be seen if this slowdown in economic activity will be prolonged, however, with the People Bank of China (PBOC) starting to ease its monetary policy settings to provide much needed support to the local economy and housing market. Should this easing be sufficient to return growth and activity back to trend, it is hard to see how FMG doesn’t resume its primary bull trend that started back in 2016.  

China Caixin Manufacturing PMI  

fortescue metals shares
Source – Trading Economics  

3 Reasons to Trade FMG Shares 

There are three major reasons to invest in FMG shares on the ASX for the longer-term investor, given the firm’s lofty goal of diversifying its business to become an integrated, global green energy and resources company.  

1. FMG Historically Offers Great Dividend  

Like many of its peers in the ASX mining and materials industry, FMG has historically offered a high dividend payout to its shareholders.  

This is because Fortescue, in the same vein as its counterparts in the industry, trades at a relatively low price-to-earnings ratio. Indeed, FMG’s P/E ratio of 5.2 is far lower than the ASX 200’s multiple of 24.52. When this is combined with a high dividend payout ratio, you are presented with the opportunity to benefit from a high dividend yield. FMG is currently trading with a dividend yield of 12%, having offered shareholders $2.07 of dividends per share in 2022.  

However, future dividend payouts may not be as generous, given the firm’s commitment to decarbonization and energy transition. Nevertheless, the prospect of receiving a consistent dividend makes FMG a compelling company to invest in for the long-term. 

2. Prioritisation of Green Energy Transition 

As the world looks to rapidly transition to a renewable/green energy future, it is pertinent that old-school mining and energy companies adapt to an environment that is becoming more and more hostile to fossil-fuel producers and processes that release significant amounts of carbon into the atmosphere.  

Fortescue’s internal division, Fortescue Future Industries (FFI), has prioritised decarbonising the iron ore miner’s operations and is actively involved in helping other industries lower emissions through technological advancement and innovation. FFI is also heavily focused on the burgeoning green hydrogen industry, with Founder and Executive Chairman Andrew Forrest stating that “The green hydrogen market could generate revenues, at the very least, of $US12 trillion by 2050 bigger than any industry we have now.  

And Australia, with characteristic luck, is sitting on everything it needs to be the world leader, but only if it acts fast”. Harnessing green hydrogen would not only provide much needed diversification to the firm’s iron ore operations but would also reduce overall power costs associated with mining, leading to increased margins and greater profits.  

3. Hedge Against Inflation

Commodities have often been looked upon as hedges against inflation due to their intrinsic value and the historic trends that show outperformance when prices for consumer goods accelerate higher.  

Indeed, research conducted by Vanguard demonstrates that over the last ten years, the price of commodities rose by approximately 7 to 9% for every 1% of unexpected inflation. With most of the developed world dealing with multi-decade high inflation rates, iron ore prices may remain elevated for the next few years. This would provide a tailwind for FMG shares, given the strong positive correlation seen with ore prices since the firm’s inception.  

Trade FMG Share CFDs with Vantage  

Although the immediate months ahead will probably prove rather bumpy for global equity markets, there are still plenty of opportunities for traders to take advantage of, on the long and short side. You can trade Fortescue Metals Group shares and others listed on the ASX via Contracts-for-Difference (CFDs) with Vantage Markets! All Vantage ASX Share CFDs are tradable in both long and short directions at 5:1 leverage. 

CFD trading allows you to speculate on the price movement of a company’s shares without actually taking ownership of them. Therefore, seize the opportunity to trade precious metals online; fully leveraging the precious metal exchange market. To explore more, click on the following link to find out more about how to begin precious metals trading.

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