The Fortescue Ltd (ASX: FMG) share price has sunk close to 40% in 2024 to date. Since 10 December 2024, the ASX iron ore share has dropped more than 10%.
The ASX mining share has significantly underperformed the S&P/ASX 200 Index (ASX: XJO) this year – the index has risen more than 5% this year. That means Fortescue shares have underperformed by more than 40%!
When it comes to cyclical businesses like Fortescue, past performance is certainly not a reliable indicator of future returns. The market doesn't know what's going to happen next month or next year. We just need to decide if today's value is attractive or not.
Let's first examine the iron ore price as it has a key influence on Fortescue shares.
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Iron ore price and predictions
According to Trading Economics, the iron ore price has fallen below US$105 per tonne but remains above US$100 per tonne.
Trading Economics noted that ongoing economic uncertainty in China, combined with a lack of specific details about proposed financial stimulus from the Asian superpower, has been a negative for sentiment. China is the key buyer of global iron ore.
While demand is challenged, supply continues to grow over time. Trading Economics noted that BHP Group Ltd (ASX: BHP) recently resumed operations at two of its Western Australian mines after a temporary halt because of heavy rain.
The iron ore price plays a key role in Fortescue's profitability because of its focus on the commodity and mining operating leverage. Mining costs don't change much month to month, so a rise in the iron ore price can largely flow to net profit. But, a reduction in the iron ore price cuts heavily into profit generation. Near the start of 2024, the iron ore price was going above US$140 per tonne – it has fallen significantly since then.
Broker UBS estimates the iron ore price could be US$100 per tonne in 2025, US$95 per tonne in 2026 and US$90 per tonne in 2027. In other words, the iron ore price is projected to slowly decline.
Would I buy Fortescue shares today?
The outlook is uncertain, particularly if incoming US President Trump's tariffs hurt China's economy. However, it's also possible that China could launch significant stimulus to boost its economy and offset tariff headwinds, which could then be helpful for the iron ore price and Fortescue shares.
This isn't the sort of flip-of-the-coin investment I like to make where there are quite a few opposing potential outcomes. But the lower Fortescue share price gives us a bit more safety.
It's also important to note that the size of the possible dividends in the next few years is very dependent on what happens with the iron ore price.
Over the past few years, I have expressed the opinion that it is better to wait to invest in ASX iron ore shares when the iron ore price is below US$100. This tends to result in a more favourable ASX share valuation. Since the iron ore price is currently above US$100 per tonne, I would prefer to wait for a lower Fortescue share price. However, I believe it is getting close to being an attractive investment.
