Much to the relief of its shareholders, the Fortescue Metals Group Limited (ASX: FMG) share price is heading in the right direction at long last.
At lunch the iron ore producer's shares are up 3% to $4.85. This has reduced its three-month decline to just under 31%.
Why has it jumped?
According to Reuters, Chinese steelmakers produced a record volume of steel in April, surpassing the previous record set in March.
China National Statistics Bureau data revealed that its steelmakers produced 72.78 million tonnes in April, up from the 72 million tonnes produced last month.
Whilst I would interpret this record amount of steel production as potentially a negative that leads to oversupply, the market appears to see it as a sign of increasing demand.
According to Metal Bulletin the spot price for the benchmark 62% fines was largely flat yesterday, whereas 58% fines jumped around 4.5%.
Should you invest?
Whilst Fortescue does look far more attractive after its 31% decline, I'm still not convinced that the worst is over for iron ore prices.
Considering the expected increase in supply and rising inventories at Chinese ports, I believe there is a chance that iron ore prices could sink to as low as US$50 a tonne over the next few months. This is roughly 17% lower than the current spot price.
Should this happen I feel Fortescue and fellow miners Rio Tinto Limited (ASX: RIO) and Atlas Iron Limited (ASX: AGO) could find their respective shares come under heavy selling pressure once again.
For this reason I would suggest investors hold off an investment for the time being and focus elsewhere in the market instead.
