China iron ore discount spurs FMG market switch

China iron ore discount spurs FMG market switch

Paul Garvey - Resources reporter - The Australian - Perth

@PDGarvey

FMG - Nev Power

Fortescue Metals Group has started shipping iron ore as far afield as Germany as it attempts to tackle the widening price discount eating into its margins.

On the sidelines of the Asia-­Pacific Regional Conference in Perth yesterday, Fortescue chief executive Nev Power said the miner had recently sent its first shipment to Germany and was looking to other markets such as India where iron ore price discounting was less extreme.

The price discount that applies of the lower-grade iron ores predominantly produced by Fortescue have widened from their historical average of about 10 per cent to the benchmark high-grade price to about 30 per cent, following policy moves by China.

A crackdown on pollution in China has prompted authorities to shut vast chunks of China’s steel industry. That has led the remaining mills to prioritise high-grade iron ores to maximise output, spurring a wider discount.

Mr Power said higher shipping costs typically meant that alternative iron ore markets such as ­Europe were out of reach, but the volatility in iron ore prices out of China bolstered the case for Fortescue to consider new markets.

“Today, we represent very significant value to steel makers outside China. The iron ore market in China has been very distorted as a result of government intervention and supply-side reform to manage the air quality in Beijing, and what that’s done is our product is now very competitively priced relative to other iron ore in non-China markets,” Mr Power said.

“We’ve had significant interest from India and European countries so we’re starting to do a lot more work there. We have done trial shipments, it’s fairly early days and low volumes at this stage, but we are looking to expand our footprint and look for markets outside those areas that have been directly influenced by (the China decisions).”

There has been a division of opinions over whether the wider discount is a short-term phenomenon or, as Rio Tinto Jean-Sebastien Jacques has argued, is indicative of a lasting structural change in the market. Mr Power conceded last month that the discount was taking longer to correct than he first thought, with Fortescue formally lowering its price ­realisation guidance for the rest of the 2018 financial year.

The iron ore discount is weighing significantly on investor sentiment towards Fortescue. Analysts at Credit Suisse — which like Fortescue believes the discount will only be temporary — warned last week that Fortescue’s net present value could slump by 70 per cent if the current price discounts persisted. The analysts also warned that a prolonged widened discount could complicate Fortescue’s efforts to maintain dividends and replace its soon-to-be-exhausted Firetail iron ore mine.

Mr Power said steel mills outside China would be drawn to Fortescue’s ore given the premiums being paid by Chinese mills for higher-grade 62 per cent iron ores predominantly produced by the likes of Rio Tinto and BHP.

“The current market price for our products, the 58 per cent and the 56.5 per cent, represent extremely good value because most steel mills can’t afford to pay the massive premiums that are being paid for high iron grade in China,” he said.

“If you translate that into steel mills outside of China, they don’t want to pay that high price for iron ore whereas ours are very competitive so our ores are becoming more and more attractive in those markets.”

China is the most dominant consumer of seaborne iron ore, accounting for around two-thirds of the global market.