Why the Fortescue (ASX:FMG) share price is getting left behind in 2021

Someone forgot to tell the Fortescue Metals Group Limited (ASX: FMG) share price that the commodity supercycle party is still raving in 2021.

Shares in the third biggest ASX iron ore producer is trading little better than breakeven since the start of calendar 2021.

In contrast, the BHP Group Ltd (ASX: BHP) share price rallied 15% while the Rio Tinto Limited (ASX: RIO) share price jumped 11%.

Even the S&P/ASX 200 Index (Index:^AXJO) is faring better. The top 200 benchmark is also sitting on gains of around 11% since January.

Why the Fortescue share price is lagging the pack

There are a few reasons why investors are refusing to dance with the Fortescue share price. One big reason is the belief that the price gap between lower quality iron ore that Fortescue sells and higher quality ore that its bigger rivals produce is set to widen.

Experts believe that the discount for iron ore with more impurities will deepen as high demand for the commodity tapers. When the bull market is in full steam, quality is always less of an issue.

Further, China’s refocus on pollution controls is another factor that could pour water on Fortescue’s exports.

The quality rotation

While these risk factors are based on probabilities and speculation, it does highlight why investors are wary of the Fortescue share price. At this point in the cycle, it’s safer to get exposure to the fabled commodity supercycle through higher quality names.

On the other hand, the underperformance of Fortescue could be due to a bout of profit taking. After all, the shares are up over 60% over the past year, which is around twice that of BHP and Rio Tinto.

Whatever the reason, the sagging Fortescue share price have prompted some brokers to comment that it won’t be returning to its January 2021 peak of $25.92.

Fortescue share price could get boosted next month

But not everyone thinks that the shares are down and out. For one, there’s every reason to believe that Fortescue will pay another record dividend when it releases its results next month.

While the iron ore price has come off its high, it’s still trading close to its record. This means the miner will be flushed with more cash than it knows what to do with. That’s always a nice problem to have.

However, whether that’s enough to return the Fortescue share price to record highs is an open question.

Moving targets

Super dividends aside, I believe that a brighter price outlook for lower quality iron ore may be an essential ingredient.

Most commodity analysts are forecasting the iron ore price to come falling back to earth. UBS for one is predicting the price to correct to US$101 a tonne next year and US$85 a tonne in 2023 and US$75 a tonne the year after.

But before one gets too pessimistic, commodity prices are notoriously difficult to predict. Most analysts (including the government) have underestimated the commodity for the past few years.

The post Why the Fortescue (ASX:FMG) share price is getting left behind in 2021 appeared first on The Motley Fool Australia.

More reading

• 2 ASX 200 mining shares that could be buys
• 5 things to watch on the ASX 200 on Friday
• Can the ASX 200 hit 8,000 points by the end of the year?
• Here are 3 of the ASX 200’s most heavily traded shares today
• What are leading brokers saying about the Fortescue (ASX:FMG) share price in July 2021?

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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