The Fortescue Metals Group Limited (ASX: FMG) share price is one of many ASX shares that are being sold off today. It's currently down more than 3%. Why?
Well, for starters, it was a bad day on overseas share markets. Volatility is picking up.
The NASDAQ-100 (NASDAQ: NDX) fell by 5.5% and the S&P 500 Index (SP: .INX) dropped by 4.3%.
ASX shares often follow on from what happened in the US share market if there was a major positive or negative movement.
Why did the US share market experience its biggest fall since June 2020? It happened because US inflation in August was up 8.3% year over year, which was 0.1% more than July. According to reporting by CNBC, economists polled by Dow Jones were expecting a month over month decline of 0.1%. In other words, inflation is as strong as ever.
This happened despite fuel prices falling in August. CNBC reported that core CPI inflation, which removes food and energy costs, rose 0.6% month over month from July.
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Iron ore price forecast reduced
One of the key elements for Fortescue's profit-generating efforts is the iron ore price. The higher the iron ore price, the more revenue and net profit after tax (NPAT) that Fortescue can make from the same iron ore shipments. This can also have an impact on the Fortescue share price.
However, according to reporting by the Australian Financial Review, Fitch Solutions has downgraded its short-term iron ore price forecasts due to the economic situation.
Fitch is projecting the average iron ore price for 2022 to be US$115 per tonne, which is a decrease from the last forecast of US$130 per tonne.
The iron ore price has been trading between US$95 per tonne to US$105 per tonne. It was noted that inventories have recovered from the low experienced in June.
It doesn't think prices will fall or rise a lot from here. Fitch said:
Miners are already beginning to react to recent price declines given their operating costs and capital expenditure costs remain elevated.
As such, we believe that prices will receive some support from supply constraints through the fourth quarter and into 2023 as higher cost miners have in several instances reduced production in response to current price levels.
Fitch suggested that the recovery of inventories and slowdown of the global economy indicate that there may be a limited upside for the iron ore price. Buyers could take advantage of the lower prices and build inventory further.
Fitch Solutions has forecast that the iron ore price will average $US100 per tonne in 2023, $US90 a tonne in 2024 and $US80 a tonne in 2025.
This could have a direct future impact on the Fortescue share price because of how it would impact the profit and cash flow.
Fortescue share price snapshot
Over the past month, Fortescue shares have dropped 8%.
