The Fortescue Metals Group Limited (ASX: FMG) share price has sunk 8% in early trading and it’s down by 26% over the last month.
What’s happening to the Fortescue share price?
Shareholders are having a bad time today.
It’s important to know that commodity businesses are going to be heavily impacted by the changes in commodity prices.
The iron ore price is currently having a bad time. Before this week, the iron ore price had sunk a long way from when it was above US$230 per tonne in May 2021.
But overnight there was a huge drop in the iron ore price – it fell around 8% to approximately US$107 per tonne.
The Fortescue share price isn’t the only one that is hurting right now. The Rio Tinto Limited (ASX: RIO) share price is down around 3% and the BHP Group Ltd (ASX: BHP) share price is around 2%.
Why are iron ore miners hurting so much?
The iron ore price may have dropped so heavily because of ongoing geopolitical news.
It was announced yesterday that Australia is going to get nuclear-powered submarines in a partnership with the US and the UK. The new partnership is called Aukus. It’s important to note that these are not nuclear armed subs, just how they are powered. Australia will become one of the few nations to have nuclear-powered subs.
The advantage of nuclear-powered subs is they are reportedly faster, harder to detect, can stay submerged for months and shoot missiles longer distances.
China does not like this development.
The BBC reported that China has called this arrangement “extremely irresponsible” and “narrow-minded”. The BBC also reported:
“Chinese foreign ministry spokesman Zhao Lijian said the alliance risked “severely damaging regional peace… and intensifying the arms race”.
He criticised what he called “the obsolete Cold War… mentality” and warned the three countries were “hurting their own interests”.
Chinese state media carried similar editorials denouncing the pact, and one in the Global Times newspaper said Australia had now “turned itself into an adversary of China”.
What to make of this for the Fortescue share price?
The iron ore price decline is clearly a difficult thing for revenue and profit. There could be a risk of China reducing iron ore purchases even further after its efforts to curb steel production in recent weeks.
There is a lot more uncertainty for the iron ore price and Chinese buying than there was last week.
China will still need iron ore in the coming years and it’s not as though Australia had a great relationship with the Asian superpower before this week – remember that China has put various tariffs on Australian goods already such as wine.
Whilst I am a shareholder of Fortescue and believe in its long-term green initiatives, I would be cautious about buying shares today because there could be more declines of the iron ore price, particularly if China decided to significantly limit purchases of iron from Australia or apply some sort of tariffs. I want to see how it plays out in the coming days, or weeks, first. The Fortescue share price could
fall further from here.
