21/08/14 – Australian Fortescue CEO says spread between iron ore grades likely to narrow


Australia’s Fortescue Metals Group said Wednesday that it expected the price spread between 58% Fe and 62% Fe grades to narrow in the coming year as the supply-demand balance is restored.

The Perth-based company said it achieved an average price of $106/dry mt CFR for its 56.7%-58.5% Fe iron ore in fiscal 2013-2014 that ended June 30. This was equivalent to 86% of the value of the Platts 62%-Fe average of $123/dmt CFR over the period, and down from around 90% the year before.

The miner said it expected to realize 85-90% of the Platts average for 62%-Fe fines in the current financial year.

Fortescue announced a record net profit of $2.7 billion for fiscal 2013-2014, up 57% year on year, due to the massive ramp-up in production capacity in the Pilbara region.

It shipped 124.2 million mt of iron ore in 2013-2014, up 54% from the previous year. The company is now producing at an annualized run rate of 160 million mt/year, it added.

But the huge amount of new seaborne supply coincided with softening demand in China, forcing the company to discount its material at times to attract buyers.

Fortescue CEO Nev Power acknowledged the spread between 58%-Fe and 62%-Fe ore grades had “opened up” but added that “we’re seeing that narrow already” on a conference call to release the earnings results for 2013-2014.

“It’s currently around 83% and I think it will continue to narrow because mills like the high value-in-use component of our products,” he said, in response to a question. “The market is starting to re-balance, port stocks are coming down and mills are restocking.

“Power said he did not believe the Chinese steel industry’s move to combat pollution would necessarily see mills favor higher grade ores. Older, less technologically efficient mills had to be more selective about the ores they used, but Fortescue’s customer base consisted of larger, more sophisticated mills with good dust controls in their sintering plants, he added.

“Environmental issues are not impacting the wider market; it’s a mill by mill issue,” he said.Fortescue lowered its production costs by 23% to $34/wet mt from $44/wmt a year earlier. Including freight, royalties and administration costs, it can land ore in China for $56/dmt CFR, Power added.

“We’re producing strong cash flows at current price levels of about $95/mt. Our expectation is that prices will drift upward again as high cost supply exits and the market and supply re-balances,” Power said.

He said that the company had also inked some contracts with steel mills outside of China.


Source – Platts.com