Fortescue Metals Group (FMG) is the third biggest iron explorer and producer in Australia. Its operations are located in WA's Pilbara region, which also hosts mining giants BHP and Rio Tinto.

FMG's holdings in the region cover close to 85,000 sq km, with resources estimated at 13.2 billion tones.

Iron ore outlook

In the last three months of 2012 the price of iron ore soared over 70%. The move was the result of increased demand from China and several high-cost Chinese miners shutting operations.

graph

The chart above shows the price of iron ore prices since the start of this year. Since the February 2013 high of US$159.9 per tonne, the price of iron ore has decreased around 30%.

The main contributor to the weakness in iron ore markets has been the slowing growth in China.

China, which accounts for approximately 60% of global iron ore demand, is facing slowing growth as evident by the recent manufacturing sector data.

The HSBC Purchasing Managers Index (PMI) returned a reading of 49.6 this month, worse than the 50.4 expected by economists. A reading below 50 indicates that the sector is contraction rather than expansion.

Outlook

FMG has a strong long-term production outlook, with the company planning to triple its production over the next few years. The problem with this is that Brazil-based Vale - the largest iron ore miner in the world - is also expanding along with Rio Tinto and BHP.

There is going to be a major amount of new supply entering the market over the next few years, and with the China demand story not as compelling as it once was, we could easily see a structural surplus in the iron market.

This is likely to further pressure iron ore prices, leading to further share price deterioration for FMG.

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