Iron ore discount likely to continue: Mineral Resources' Chris Ellison

Iron ore discount likely to continue: Mineral Resources' Chris Ellison


Iron ore discount likely to continue: Mineral Resources' Chris Ellison

China is serious about cracking down on polluting steel mills and this could mean the wider discount on iron ore sticks around for longer, according to Chris Ellison. Reuters
Tess Ingram

by Tess Ingram

China's heavy discounting of lower grade iron ore is likely to increase further in January and February, according to Mineral Resources managing director Chris Ellison, who expects the disjoint to persist for the "foreseeable future".

In sharp contrast to assurances from Fortescue Metals Group that the wider delta between prices from higher and lower grade iron ore will correct, Mr Ellison said he believed the discounts would linger because the Chinese government was serious about enforcing tougher pollution control measures.

"We would like to see the market stabilise or improve slightly from where it is but I think we are getting into Christmas and Chinese New Year and traditionally at this time of year we are not going to see a lift in price," Mr Ellison told The Australian Financial Review.

"My guess is by the time we get into January or February it [the discount] is probably going to increase even more."

Lower grade iron ore, including that produced by Mineral Resources, has been sold at an increasing discount to the 62 per cent iron grade index price since late 2016.

Fortescue, which is somewhat considered the "price setter" for other local lower grade producers, has gradually offered wider discounts, reportedly as much as 40 per cent, but remained adamant the market will eventually normalise to historic discounting levels of about 10 per cent.

Synthetic graphite

After suggesting in August the discount would correct by the end of the 2018 financial year, Mineral Resources flagged on Tuesday it believed the "heavy discount situation" was expected to "continue in the medium term".

"It has been growing for 12 months, it is not going to go away overnight," Mr Ellison, a Financial Review Rich List member, said.

"I don't see it easing in the next six to 12 months. I think that these discounts are going to be ingrained in the system for the foreseeable future – they [Chinese buyers] clearly want more high grade. The low grade is not as economic to use as it was."

If the discount worsened significantly, Mr Ellison said Mineral Resources did not want to "waste" its iron ore reserves so would consider suspending operations until a unique transport system it is developing, called the Bulk Ore Shuttle System, could be implemented to lower its costs.

US miner Cliffs recently predicted the discounts applied to lower grade iron ore could threaten its Australian iron ore export business.

Mr Ellison said the market dynamics did not affect the prospects for the company's proposed Bungalbin East and Jackson 5 mines, which are being considered by the West Australian government after the state's environmental watchdog advised against their development.

Elsewhere, Mineral Resources continues to cement its position in lithium and has increased its exposure to synthetic graphite, both raw materials used in the batteries powering electric vehicles.

It came as Mineral Resources called on its shareholders to vote against proxy advice and support its remuneration report at its November 22 annual meeting.

Stakeholder consultation

After it collected a "first strike" last year, independent director James McClements said the company "engaged in considerable stakeholder consultation" following which it concluded the "rigid" scoring system adopted by many proxy advisors "completely disregard previous company performance as well as the uniqueness of the subject company".

The company said it had made changes to its remuneration structure but it continued to disagree with proxy advisers on some issues, including the structure of the long-term incentives and Mr Ellison's package, which it opted to increase for 2017 following an independent review.

"We unashamedly accept that our remuneration structure will not tick all the boxes the inflexible systems used by proxy advisers require be ticked in order to recommend a supporting vote," Mr McClements said in a letter to shareholders.

"We say unashamedly because we are supremely confident this same remuneration structure sets the foundation for the ongoing generation of considerable shareholder wealth over the long term."

If Mineral Resources receives a second strike against its executive pay on November 22 it faces a vote on a board spill.