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Highlights
- Fortescue Ltd (ASX:FMG) faces a 33% drop in its share price in 2024.
- UBS predicts further downside, forecasting a 10% decline in Fortescue shares.
- China’s economic policy shift may influence iron ore demand and Fortescue's prospects.
Fortescue Metals Group Ltd (ASX:FMG) has faced a tough year in 2024, with its share price falling more than 33%. The significant decline is a reflection of the broader volatility in the iron ore market, with cyclical fluctuations often affecting ASX-listed mining shares. As the world's second-largest iron ore exporter, Fortescue’s fortunes are closely tied to the price of iron ore, which, in turn, is heavily influenced by the demand from China, the largest global consumer of the commodity.
The Iron Ore Market and Fortescue's Outlook
The iron ore market has had its ups and downs in 2024, and as of early December, the price of iron ore rose above USAUD106 per tonne. This increase was largely driven by speculation that China might introduce more financial stimulus measures. Reports suggest that the Politburo of China has skipped its regular November meeting, leading to increased speculation about potential economic stimulus, especially as political discussions surrounding global trade intensify, particularly with the prospect of former US President Donald Trump returning to office, potentially imposing tariffs on nations in the BRICS bloc.
Additionally, the Chinese steel market has shown positive signs, which is contributing to the strengthening outlook for iron ore demand. China’s strong steel exports and efforts to destock inventory have helped boost steel margins, supporting higher production levels. Furthermore, the latest Chinese manufacturing data indicated that activity had expanded for the second consecutive month in November, further strengthening the demand outlook for iron ore.
Despite the recent uptick in iron ore prices, Trading Economics projects a decline in the price over the next year, forecasting it to fall to USD97.09 by the end of 2025. With this uncertain pricing outlook, it remains difficult to predict how Fortescue's share price will perform in the coming months.
UBS's Pessimistic Forecast for Fortescue
UBS, a prominent global broker, is bearish on Fortescue’s share price in the short term. The firm has maintained a "sell" rating on the stock, with a price target of AUD17.60. This price target suggests that UBS believes Fortescue’s share price could drop by another 10% over the next year. This forecast comes after Fortescue's first-quarter FY25 results, which UBS described as missing expectations. According to the broker, factors such as adverse weather and weaker-than-expected iron ore prices are contributing to the pessimistic outlook.
UBS has identified several key factors that will likely influence Fortescue’s performance moving forward:
- Iron Ore Prices: China’s economic policy changes are expected to remain the most significant driver for the iron ore market, though UBS does not expect a large stimulus package focused on steel. UBS is forecasting iron ore prices of USD100/95/90 per tonne in 2025/26/27.
- Production Costs and Guidance: Fortescue’s December quarter performance will be important, especially as lower production and higher costs could make it challenging to meet FY25 guidance.
- Iron Bridge Project: UBS will be closely watching the realized price from Fortescue’s Iron Bridge project, particularly in light of weaker performance earlier in the year.
- Energy and Investments: The broker expects that Fortescue will likely delay major investment decisions until the right policy environment is in place, particularly regarding energy.
Financial Forecasts and Dividends
UBS has also provided its financial projections for Fortescue, suggesting the company could generate AUD15.9 billion in revenue for FY25. The broker estimates an operating profit (EBIT) of AUD5.4 billion, a net profit of AUD3.7 billion, and earnings per share (EPS) of AUD1.20. Furthermore, UBS projects a dividend of 86 cents per share, which would result in a fully franked dividend yield of 4.4%. When considering franking credits, the grossed-up dividend yield would be 6.3%.
While Fortescue faces some significant headwinds, particularly from the fluctuating iron ore prices and production challenges, the company’s projected dividends and strong financial performance could offer some stability for investors in an uncertain market.
