Why is the Fortescue share price firing up 4% today?

The Fortescue Metals Group Limited (ASX: FMG) share price is up around 4%, at the time of writing.

The ASX iron ore mining share is one of the leading performers within the S&P/ASX 200 Index (ASX: XJO), though gold miners are leading the way.

Let’s have a look at what’s happening with the commodity prices.

Iron ore price

According to Commsec, the iron ore price went up by 2.1% to US$85.16 in overnight markets.

Commodity businesses’ success is heavily leveraged to the price of that commodity.

A change in the iron ore price doesn’t really change how much it costs to mine a tonne of iron. So, getting extra revenue for that tonne of production largely adds to the company’s net profit after tax (NPAT) and cash flow.

FY21 was a good example of that – while revenue increased by 74% to US$22.3 billion, NPAT went up by 117% to US$10.3 billion.

FY22 showed that effect in reverse. Revenue dropped 22% to US$17.4 billion while NPAT fell 40% to US$6.2 billion.

What is helping Fortescue shares?

According to reporting by various media, including the Australian Financial Review, some participants in commodity markets think that there could be a resurgence in commodity prices because China may decide to “ease travel and other COVID-19 related restrictions”.

Reporting by Reuters said that “a former Chinese senior disease control official told a closed-door conference that substantial changes to the country’s zero-COVID policy were set to take place in the next five to six months, according to a recording of the session heard by Reuters.”

Reuters quoted Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, who said:

Any indication that some rules could be relaxed would be an immediate dose of grease in the jarring cogs of China’s economy.

China is the biggest customer of Australian iron ore, so what happens there can have a significant impact on what happens with the iron ore price and therefore the Fortescue share price.

In the past, China has used infrastructure spending to try to boost its economy. Steel, which needs iron, is usually an important part of an infrastructure project.

Broker opinions on the Fortescue share price

One of the latest views comes from Citi, with a neutral rating and a price target of $16.70. That implies that Fortescue shares will be flat for the next year.

It has reduced its expectations for the iron ore price over the next year. Citi thinks that Fortescue is valued at 12 times FY23’s estimated earnings and 8.5 times FY24’s estimated earnings.

The post Why is the Fortescue share price firing up 4% today? appeared first on The Motley Fool Australia.

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More reading

• Why are ASX 200 mining shares bolting out the gates on Monday?
• Looking to buy Fortescue shares? Here are the questions I asked before jumping in
• Hotels, hurt feelings, and HR hassles, but Fortescue’s biggest shareholder still got richer this week
• What’s the forecast for the iron ore price right now?
• Which ASX 200 mining shares managed to dig up gains in October?

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group Limited. 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 Scott Phillips.

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