Fortescue Metals Group says China is distorting iron ore markets

10th November 2017
Resources Rising Stars

Fortescue Metals Group chairman Andrew Forrest has linked the price chasm between high and low grade iron ore to the power of Chinese President Xi Jinping as the company accelerates efforts to find new markets, reports The Australian Financial Review.

Speaking at the company's annual meeting in Perth on Wednesday, Mr Forrest said the premiums being paid for high grade ore and weaker prices for lower grades were more pronounced because Chinese steel mills no longer dared to ignore orders from Beijing.

President Xi's crackdown on pollution has pushed mills to use higher grade ores regardless of the impact on their operating costs and margins per tonne. The steel price has increased as a result.

Mr Forrest said steel mills once took edicts from Beijing as guidelines that could be blurred or ignored.

"That doesn't happen any more under President Xi. If orders go out, those orders are adhered to. In some cases they are voluntarily maximised, people go above their expectations," he said.

Mr Forrest said China's policies had created a non-market distortion in iron ore prices, with discounts of 25 per cent to 30 per cent on lower grades.

"That has led to a lowering of the dollar value of our value-in use iron ore. It has led to a non-market driven increase in high grade iron ore, which Australia generally doesn't produce," he said.

Earlier this year Fortescue chief executive Nev Power said the larger discounts on lower-grade products it produced would be short-lived. It was in stark contrast to comments from higher quality producers including Rio Tinto, which said in August the shift was structural and would persist.

Last month, Mr Power conceded he may have underestimated the extent and duration of the discounting but remained adamant the dynamic would eventually correct.

Mr Forrest told investors it would be a "tragedy" for Australia and a poor use of the country's mineral resources if high grade iron ore was stripped from deposits and the remainder left behind and rendered non-commercial.

Fortescue is counting on non-China steel makers impacted by higher prices for high grade iron ore to soak up lost demand for its lower grade product.

The non-China market makes up about 5 per cent of Fortescue's total iron ore sales, which produced revenue of $US8.4 billion in 2016-17.

Mr Power described sales to those markets as embryonic, but predicted they would grow rapidly because of what was happening in China.

"What we have seen is because of government intervention. The steel price has gone very high and steel mills are paying enormous premiums for high grade iron ore to maximise production, but that doesn't apply to the rest of the steel world," he told investors at his last meeting as chief executive.

"We are already servicing most of those markets (United Kingdom, Germany, India, Central and south-east Asia). We are accelerating that now and will look to leverage off the advantage given by our ore carriers to reduce the cost of servicing our customers in those markets."

Fortescue announced it would have two deputy chairs, appointing current directors Mark Barnaba and Sharon Warburton as co-deputy chairs.

The miner also decided which way to jump in finding a replacement of its ageing Firetail mine in the Pilbara.

Firetail needs to be replaced from about 2021 at an anticipated capital cost of $US1 billion to $US1.5 billion.

Fortescue agonised over two options for its replacement – the Eliwana deposit at its Western Hub or the Nyidinghu Hub – before opting for Eliwana.

"It was a close call. However, we believe Eliwana gives us the most flexibility in terms of different product options and in terms of capital and operating costs and speed to markets," Mr Power said.

"We evaluated all of those elements and elected to go ahead with the feasibility study on Eliwana.

Mr Forrest said the Western Hub was the "great frontier" for Fortescue.

"Sending infrastructure out there will be one of Nev's great legacies. You will see mine after mine after mine developed off that," he said.

Mr Power received a standing ovation at his last meeting and got special thanks from the Australian Shareholders' Association and a long hug from Mr Forrest during an at-times emotional meeting.

 

Image via Fortescue Metals website

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