The recent slump in the Fortescue Metals Group Limited (ASX: FMG) share price has coincided with a slight pullback in iron ore prices.
Iron ore took a partial retreat this week from 10-year highs of US$175 per tonne to US$168 per tonne. The weakness in iron ore was triggered by new policies in China to curb carbon emissions and consequently, steel production and iron ore demand.
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Are Chinese policies dragging the Fortescue share price lower?
China appears to be taking its first steps in its ambitious goal to achieve net-zero emissions by 2060. The city of Tangshan is one of the country's most polluted cities due to its heavy industrial output.
Early this week, the South China Morning Post reported an emergency municipal meeting occurred on the weekend during which factories were ordered to "limit or halt production on days when a heavy pollution alert was in place to reduce the overall emissions of air pollutants such as sulfuric dioxide or nitrogen oxide by 50 per cent".
This announcement could be one of the reasons the Fortescue share price closed 4% lower on Monday.
Broker downgrade
A note has come out of Morgan Stanley today citing the emission policies in Tangshan could be the beginning of major iron ore market headwinds.
Morgan Stanley believes that the emission cuts could be a contributing factor that brings the iron ore market from its significant deficit to balance.
Iron ore markets have been in a significant deficit due to soaring industrial activity from China and supply-side challenges from overseas iron ore producers. But the tides could turn as China's stimulus eases and global supply returns to normal.
The broker's analysts also noted that improving mill profitability could result in greater discounts for low-grade iron ore. Between Fortescue and ASX iron ore majors BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), Fortescue produces the lowest iron ore grades. Fortescue's average grades sit at approximately 57% to 58%, while BHP and Rio produce respective grades of 60% and 61%.
As a result, Morgan Stanley rates the Fortescue share price as underweight with a $17.45 target price. This represents a downside of ~14% to the current share price, excluding dividends.
