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the Fortescue Metals Group Limited (ASX: FMG) share price rose in the first week of October. Since the beginning of the month, it is up nearly 5%.
He is not the only one who has seen a positive start to the month. the S&P/ASX 200 Index (ASX:XJO) as a whole is up more than 5% following the surprise interest rate hike by the Reserve Bank of Australia (RBA) on Tuesday. It was only a 25 basis point gain this month, less than many experts predicted.
What is the outlook for iron?
For the next few years at least, the performance of iron ore could be key for Fortescue.
Fortescue’s current generation of earnings and cash flow depends on its iron ore mining. The higher revenue from the iron ore it produces largely translates into higher net profit after tax (NPAT) and cash flow for the company.
But, the opposite is true when the price of the resource goes down. Iron ore has been falling lower since June. The price of iron ore is currently around US$95 a tonne, according to CommSec.
Some experts believe that the price of iron ore will decline in the next two years. This could put pressure on Fortescue’s share price.
resources and energy quarterly report of the chief economist of the Department of Industry, Science and Resources notes that the price of iron ore fell by around 20% in the three months to September 2022.
The drop was attributed to growing fears of a global recession, new outbreaks of COVID-19 and weakness in China’s real estate sector. These have dampened global demand for steel and iron ore in recent months.
The chief economist’s report projects the iron ore benchmark price at an average of US$90 per tonne in 2023 and around US$70 per tonne in 2024. This is expected to lead to reduced profits for ore miners. of iron.
The latest on Fortescue’s green efforts
Fortescue has a plan to become a decarbonized materials and green energy powerhouse. Producing green hydrogen and green ammonia is a key focus for the company.
It recently announced its $6.2 billion capital investment plan by 2030 to de-risk fossil fuels and reduce operating costs by $818 million per year.
Cumulative operating cost savings are US$3 billion by 2030, with a payback of capital by 2034 at current market prices.
Fortescue Future Industries will also establish a “significant new opportunity for green growth through the production of carbon-free iron ore products and through the commercialization of decarbonization technologies.”
The success of these efforts could be a major driver of Fortescue’s stock price going forward.
Fortescue founder and CEO Andrew Forrest said:
Fortescue, F.F.I. [Fortescue Future Industries] and FMG, is moving fast to become a global green metals, minerals, energy and technology company, capable of delivering not only green iron ore but also the minerals, knowledge and technology critical to the energy transition.
FFI is partnering with Tree Energy Solutions (TES) to develop a green hydrogen import facility in Germany. A $127 million investment will be funded by FFI’s unused capital commitment and provides FFI with a path to access “critical infrastructure to execute its strategy.”
TES is developing a portfolio of terminals worldwide that will allow the transport of green energy.
The first phase of the partnership is to develop and invest in the supply of 300,000 tons of green hydrogen. The first delivery to the TES terminal in Germany is expected to take place in 2026. This could help introduce green hydrogen into power grids and thus help Fortescue’s share price.
The UK and Europe urgently need green solutions to replace fossil fuels and this investment will enable Europe to do just that. Not in 2050, but in four years.