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Fortescue shares: where next in 2023?

Fortescue shares are dependent on high dividends and strong iron ore prices, primarily dictated by demand in China.

iron ore Source: Bloomberg

Fortescue shares have risen by 319% over the past five years to AU$20.53, representing an excellent asset for long term investors. However, recessionary jitters have swept through the markets in 2022, and Fortescue has not been unaffected. The fourth largest iron ore producer in the world was worth as little as AU$14.70 in late October and will likely finish the year largely flat.

And 2023 looks no less volatile.

Fortescue share price: 2023 iron ore prices

Fortescue is one of the world's lowest cost iron ore producers, shipping over 180 million tonnes of ore per year, with more than 1.7 billion tonnes delivered since 2008. Operations include three mining hubs in the world-class Pilbara mining district, connected by high-speed rail to Port Hedland, from which much of its ore is shipped to China, Japan, and South Korea.

And in a recent quarterly activities report, billionaire Executive Chairman Dr Andrew Forrest enthused that Fortescue had seen ‘a strong start to FY23 with record first quarter shipments of 47.5 million tonnes.’

But the iron ore price through 2023 will largely dictate Fortescue’s share price, and the iron ore price is itself largely dictated by Chinese policy. And mass protests in China’s major cities, sparked by a possible mortgage crisis and exacerbated by continued draconian lockdowns have forced the Communist Party into an embarrassing climbdown from its strict ‘zero-covid’ policy.

Among other changes, rapid tests have replaced PCR tests, central quarantine facilities are no longer compulsory, public spaces no longer require PCR tests for entry, and interprovincial travel has been reallowed. This could be just the first step towards a full reopening, including for travel, factories, and ports.

However, this reopening is creating a problem, because Chinese-made vaccines are far less effective than western mRNA shots. And while China’s government is finding the economic, political, and social cost of lockdowns too much to bear, the recent re-opening may not last long as healthcare systems come under sustained pressure. And unlike the in west, Chinese vaccines are not a way out as their effectiveness is not sufficient to achieve herd immunity.

Then there’s China’s property sector, which accounts for circa 30-40% of the country’s GDP and has struggled through 2022 among a mortgage crisis sparked by a crisis of confidence in Evergrande. The government has now stepped in with a 16-point plan to help support the sector, with further help likely to come through 2023.

This leaves the price of iron ore on an uneven trajectory through 2023, dependent on China’s pandemic problem, recessionary factors, and state support. For context, Fortescue posted an average realised iron ore price of US$99.80/dmt over the last financial year. This was substantially down from the US$135.32 it achieved in FY21.

One future possibility to watch is the China Iron and Steel Association, a new state-owned company designed to centralise iron ore purchases which could act as a partial buyer’s cartel in the event of an iron ore glut. It’s worth noting that Rio Tinto, BHP, Fortescue, and Brazil’s Vale account for about 70% of world trade and about 80% of China’s iron ore imports.

Fortescue green push

For ESG investors, Fortescue has placed a heavy focus on its US$6.2 billion capex plan to decarbonise by 2030. This will include deploying 2GW to 3GW of renewable energy generation and battery storage, to achieve net operating cost savings of US$818 million per year from 2030.

Overall, the company expects to save US$3 billion by 2030 and see its capital investment paid back by 2034. It’s also planning to ramp up green hydrogen production to 15mt per annum by 2030, with production to start sometime in 2024-25. The long-term plan is to sell ‘green’ iron ore to customers outside of China to diversify risk away from its core customer base.

Finally, a key Fortescue attractant is its current 14.5% dividend yield, with the ASX 200 company maintaining a dividend policy constituting a dividend pay-out ratio of between 50-80% of net profit after tax. But Fortescue was forced to slash dividends by 42% in the last financial year amid falling commodity prices, leaving dividends for the coming year a complex variable.

But long-term, Fortescue shares remain one of the ASX 200’s favoured stocks for its long-term strategic planning and core operator status within the iron ore space.

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