Freight Rail

Price gap widening for FMG’s lower grade ore

Two fortescue locos - Photo FMG

Fortescue’s next chief executive will have to deal with a harsher discount on the company’s lower-grade iron ore, with analysts reporting a wider gap between the global spot price, and what FMG is getting for its ore.

Some of FMG’s iron ore is of a slightly lower grade than the 62% standard, often coming in around the 57% mark.

Despite being just five-or-so percentage points below the benchmark, FMG’s lower-grade ore has typically attracted discounts on the market of between 10-15%.

This gap widened further in FY17, with FMG reporting a discount of 23% in its annual report, trending towards 27% in the June quarter.

The miner said it expected a discount of between 20% and 25% in FY18, but conceded prices would be “slightly below the low end of guidance in the first half before increasing in the second half of FY18.

Through the start of the new financial year, the discount has reportedly widened further, to 32% in August, and a reported mark of 35% as recently as September 8.

UBS analyst Glen Lawcock reportedly told Fairfax he believes the wider discount figure will be a factor for the next five years, meaning “the benchmark price is no longer a good guide for the prices achieved by low-grade producers”.

FMG chief executive Nev Power reportedly told AFR the miner expects the discount to remain wide in the short term, but to return to a more reasonable figure in the longer term.

“[The large discount] is expected to continue in the short term while steel mill profitability, increased coking coal prices and iron ore port stockpiles remain at current high levels,” he was quoted as saying.

“In the longer term, Fortescue expects average price realisations to revert to historic levels as market conditio0ns normalise and steel mills maximise the value in use of their operations.”

The whole issue will soon be another person’s problem, though, after Power announced on September 15 he will step down on February 16, 2018.

FMG founder, chairman, and major shareholder Andrew ‘Twiggy’ Forrest said he was personally saddened by Power’s decision.

“Seven years from his commencement, Nev will hand over the reins,” Forrest said. “Over our 15 years of stable leadership with only two CEOs, a feature of our success has been the very strong, personal and professional relationship between chairman and CEO, driving the unique culture of our company.”

The Reserve Bank of Australia this week said figures coming out of China suggest the country’s massive steel production boom, and subsequently the global iron ore market, may have reached their peak.

Minutes from the RBA’s recent board meeting detail their discourse relating to iron ore – a market very important to the Australian economy – and China’s key role in driving it.

“Members discussed the influence on the global iron ore and steel markets,” the report explains.

“They noted that China … with the world’s largest population, had reached a similar level of steel production per capita to that of industrialised economies.”

While iron ore prices have been supported at higher levels during this significant growth, the fact China has now reached that significant steel production per capita mark, means demand growth may now slow down in the iron ore market.

“Prices [are] expected to fall in the period ahead because of the ongoing expansion of global iron ore supply following an extended period of strong investment,” the RBA said.

“Members also noted that Chinese steel production capita was likely close to its peak and that growth in Chinese steel production would not add much to global demand for iron ore in the future.”

Another Asian giant could offer some reprieve in the future, however.

“Members observed that, in the longer run, there was potential for India to have a noticeable effect on commodity markets as investment in residential construction and transport infrastructure increased.”