Should FMG and its investors panic now that iron ore prices have crashed below $100/t?

As one of the world’s largest iron ore miners, FMG’s fate (and that of its investors) closely tied to fluctuations in iron ore prices. Now that the price of iron ore is below $100 per tonne, there are concerns about its impact on FMG (Fortescue Metals (ASX:FMG)) and the broader iron ore sector.

With this essential commodity’s price drop, there is significant demand for this material that can cause oversupply of iron in the market. So, it is vital to understand why the prices of iron are declining and what it means for the companies in the mining sector before considering investing in this resource.

 

What’s the Current State of Iron Ore Market?

Why are Iron Ore Prices Falling

As the dynamics of demand and supply are shaped by global forces, it is no surprise that most of the recent dips below $100 per tonne were triggered by various factors. One of the main ones was the slowdown in China’s economic growth. As the largest consumer of iron ore worldwide, reduced infrastructure spending and a sluggish property market mean less steel production, a direct blow to prices.

The major producers like FMG, Rio Tinto, and BHP have also been operating at high levels, leading to an oversupply in the market. Of course, the general global economic environment has also played a role. Fear of recessions and decreased expenditures on infrastructural projects in the US and Europe have frayed the hope for strong demand in iron ore. Environmental regulations, especially in China, have reduced steel production, thus adding pressure to mining companies.

What are the Trends in Iron Ore?

In 2021, the price of iron ore surged to over $220 per tonne due to recovery after the strong demand. This showed in the company’s results with a record US$10.3bn profit and US$22.3bn in revenues!

By the end of 2024, though, the price had dropped below $100 per tonne, signalling a shift back to pre-pandemic conditions when prices were steadier but posed difficulties for producers with higher costs. The lower price environment hit FMG’s top and bottom lines. In FY22, the company made US$17.4bn revenue and a $6.2bn profit. FY23, revenues were flat due to record iron ore shipments – at $16.9bn – although its profit fell another 23% to $4.8bn (inclusive of a US$726bn impairment). FY24 saw a slight improvement with $18.2bn revenue (up 8%) and a $5.7bn profit (up 3% from the underlying result in FY23 – that is to say without the impairment).

You can see that iron ore prices will have their impact. But that doesn’t mean you should avoid investing in FMG altogether.

 

3 Reasons to like FMG regardless of what iron ore prices do

A Low Cost Producer

FMG has built its reputation on being one of the lowest-cost producers of iron ore globally. Its cash production costs, which hover around $17–$18 per tonne, provide a significant buffer against price declines. This cost advantage has allowed to remain profitable even in challenging market conditions, setting it apart from higher-cost competitors. But of course, the company can only cut its costs so much in order to remain in business.

 

Performance

In 2024, FMG reported robust production numbers, with shipments exceeding 190 million tonnes. However, the declining iron ore prices impacted its revenue and net profits. Despite this, FMG maintained strong cash flows and reduced its debt, ensuring financial stability. The company’s disciplined approach to cost management and its ability to generate consistent cash flow have reinforced its position as a resilient player in the mining sector.

 

Dividend Stability of FMG

FMG is known for its attractive dividend payouts, which are tied to its profitability. With iron ore prices below $100, the company may face pressure to adjust its dividend policy. However, FMG’s strong balance sheet and focus on cost efficiency may allow it to sustain competitive returns for shareholders. For a couple of years, its low share price meant it was generating yields of over 10%, but if it cuts its dividends the yields will dry up.

 

How will FMG be impacted by Falling Iron Ore Prices?

Profitability and Revenue

The drop in iron ore prices directly impacts FMG’s revenue and profit margins. With prices below $100 per tonne, the company’s revenue may decline significantly, especially if production costs rise due to inflation or logistical challenges. This price environment could also affect FMG’s ability to fund large-scale projects and maintain its dividend policy.

 

Growth of FMG

FMG has ambitious growth plans, including its diversification into renewable energy through Fortescue Future Industries (FFI). These initiatives rely heavily on cash flow from its iron ore operations. Sustained low prices may delay investment in green hydrogen projects and other ventures, potentially affecting FMG’s long-term diversification strategy.

 

Current Competition

Despite the challenges posed by low prices, FMG’s low-cost production model (not to mention its strategic location to end markets in the Asia-Pacific) gives it a competitive edge. This advantage enables the company to maintain market share and continue serving price-sensitive markets effectively. However, the company will need to remain vigilant in managing costs and exploring new opportunities to stay ahead of its competitors.

 

What are the Strategies FMG Could Employ in 2025?

Cost efficiency has been an integral part of FMG’s business model, but the current price environment emphasises it. The company could continue to lower its production costs by automating the processes, yielding technological innovation, and streamlining logistics. Such steps may help FMG to maintain its margins and be a low-cost leader.

You may have also heard about FMG’s renewable investments. It is looking to build these renewable investments into a legitimate business in its own right, that will come, in part, through investments into renewable energy and green hydrogen production. These have significant long-term value potential but need a lot of capital expenditure for their value to be realised. Still, such diversification would help FMG navigate any fluctuations in iron ore prices as well as align with global sustainability trends.

With China’s demand slowing down, FMG could look into other markets like India and Southeast Asia where steel demand is said to increase. These would be opportunities to offset the shrinking supply from China and drive further growth in FMG’s global footprint. But as we’ve seen with infant formula stocks, other markets just cannot substitute China’s demand – not even India with its 1bn+ population can match China’s demand. China accounts for 70% of global demand.

 

FMG and Global Dynamics

Given China accounts for such a high share of iron ore demand, Any shift in economic policies or increased infrastructure spending in China impacts the bottom line of FMG. Though demand might continue to be soft in the near term, long-term needs for both urbanisation and infrastructure could lend support to a revival of Chinese demand.

Most importantly, however, is the continuing tightening of global environmental regulations, which FMG’s leadership in sustainable mining practices puts the company ahead of changing requirements. Initiatives for carbon emissions reductions and investments into renewable energy resources should increase FMG’s reputation among ESG-focused investors, who can open up new growth opportunities.

 

What Awaits for FMG in 2025?

Opportunities

FMG’s commitment to sustainability aligns with the global push towards decarbonisation. By reducing its carbon footprint and investing in green energy, FMG can position itself as a leader in sustainable mining. Many countries are looking to expand their urbanisation by formulating development plans. This will significantly raise the demand for steel and iron, thereby helping FMG diversify its revenue streams.

 

Risks

A sustained period of low prices could strain FMG’s profitability and delay its growth initiatives. Trade tensions between China and Australia could disrupt FMG’s exports and affect its market share. Inflation and supply chain disruptions may increase costs and impact production efficiency.

 

Final Thoughts

The drop in iron ore prices below $100 per tonne presents significant challenges for iron ore companies like FMG, there’s no shying away from that fact.

Ths being said, we think the company’s resilience and adaptability position it to navigate these headwinds effectively. Of course, there is a point where iron ore prices would be so low it would make the Pilbara operations unprofitable, we think the company is a very long way from that point – it would likely only happen in a period of excess supply.

 

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FAQs

• Will FMG continue to pay dividends despite low iron ore prices?

  FMG has a history of paying competitive dividends due to its strong cash flow, even in times of lower iron ore prices.

• How does the global iron ore supply and demand impact FMG’s performance?

  FMG’s performance is closely tied to global demand for iron ore, especially from China, the world’s largest consumer.

• How does a decrease in iron ore prices impact FMG’s profits?

  Since iron ore constitutes the majority of FMG’s income, a sharp drop in prices like the one below $100 per tonne can result in lower earnings.

• What is FMG’s strategy for surviving prolonged low iron ore prices?

  FMG’s strategy focuses on being a low-cost producer and maintaining profitability through operational efficiency.