Fortescue tips rising demand in China for its iron ore

5 February 2018

Fortescue Metals Group is predicting a rise in the use of its ores in Chinese steel making, while confirming that the average price for iron ore contracts entered into during the December quarter dropped to 66 per cent of an industry benchmark price.

Fortescue was hit by these “discounts” as Chinese steel-makers favoured ore with higher iron grades than that produced by Fortescue, which they paid higher prices for, as steel-makers responded to a push by Chinese authorities to tackle air pollution.

Contract prices at 66 per cent of the industry benchmark price are below the iron ore giant’s full-year price guidance, but Fortescue said on Tuesday that its full year price realisation guidance for fiscal 2018 remained unchanged, at 70-75 per cent of the industry benchmark price.

Greg Lilleyman, Fortescue’s director of operations, said on Tuesday that the miner’s Chinese customers expect further easing in the price gap between iron ore grades.

Mr Lilleyman expressed confidence in Chinese demand for Fortescue’s iron ore, citing a recent two week visit to the country during which he visited 26 Fortescue customers.

He said Chinese steel-makers expected their margins to decline, and indicated that they would “look to increase the use of the higher value-in-use ores and lower fee ores, such as FMG’s. The shift will be from production as the number one priority, back to unit cost.”

Fortescue’s outgoing CEO, Nev Power said the market conditions in China had resulted from “significant intervention in the market by the Chinese Government. So it was always expected that with that intervention coming to an end in March, that we would see the market rebalance. And steel mills, typically, will always look at minimising their cost of production. So that tilts the market back significantly in favour of high-value use ores, like our own.”

In its December quarterly production report, released on Tuesday, Fortescue said its mining, processing, rail and shipping performance was in line with previous guidance, at a rate of “170 million tonnes per annum with total shipments in the first half of 84.5 million tonnes”.

In the December quarter it shipped 40.5 million tonnes of ore, down 4 per cent on the December quarter of 2016, and about 8 per cent below the 44 million tonnes of iron ore shipped in the September quarter of 2017.

The iron ore giant recorded an impressive result on costs, reporting that cash production costs were lowered to a record $US12.08 per wet metric tonne. Fortescue maintained its full year cost guidance at $US11-$US12 per wet metric tonne.

The miner reported cash on hand of $US900 million at the end of December, and gross debt of $US4.2 billion. The company’s net debt climbed to $US3.3 billion.

Mr Power said the miner had recorded “another excellent result” for the December quarter.

“Our productivity and efficiency initiatives have continued to reduce the cost base, offsetting higher strip ratios, exchange rates and fuel prices,” he said.

Mr Power said Fortescue remained focused on improving safety, and generating strong cash margins and shareholder returns.

Fortescue said steel production in China during 2017 remained consistent, “continuing strong demand for iron ore.  More recently, steel mill profitability has moderated while coking coal prices have fallen. These trends are expected to result in steel mills seeking to minimise input costs by increasing the use of high value-in-use, low impurity Fortescue ores”.

Peter O’Connor, senior analyst at Shaw and Partners, said Fortescue’s December quarter 2017 scorecard “was OK on production/sales, costs and guidance, although a slight miss on price realisation (not as much as feared though).”

Mr O’Connor also highlighted Fortescue’s ability to continue to cut production costs.  “How do they do it? Rio and BHP must be trembling and sharpening their pencils (if not they should be),” he said.

Source: THE SYDNEY MORNING HERALD