Chinese centralised buying desk engages as Fortescue Metals Group breaks export records
Fortescue shipped record iron ore levels in the December quarter ahead of a potential major shake-up of iron ore markets this year.
Fortescue Metals Group has confirmed it has had early engagement with China’s state-owned iron ore buying desk as the ball begins to move on Beijing’s move to up-end the iron ore market.
Fortescue executive chairman Andrew Forrest on Friday said he expected pent-up demand for property in China to drive commodity markets in 2023, flagging a strong return of the Chinese economy after last year’s withdrawal of Covid-19 restrictions.
“Importantly for the commodities market that huge population is ready to roll,” he said.
“There’s going to be nothing wrong with that economy. You can pick holes in it, but generally it will be a very major growth centre and will absorb huge amounts of commodities from around the world as its people want to get back on track.
But, as Fortescue looks to advance its iron ore and other commodity projects outside of Australia, the company confirmed the China Mineral Resources Group is now starting to become active in the market.
CMRG is likely to become the world’s biggest iron ore buyer after it consolidates purchases for about 20 of Chinese biggest steelmaking groups, including Baowu Steel.
It was established in July 2022 to buy raw materials for the China’s domestic steel industry, in a market shake-up designed to give more market power to Chinese authorities, who regularly criticise iron ore market dynamics every time iron ore prices lift above $US110 a tonne.
If CMRG enters the market at scale and is successful in moderating the extraordinary volatility in iron ore markets seen over the last three years, it could signal the biggest shake-up of the market since Chinese buyers drove the end of the annual iron ore price negotiating system in 2010.
Fortescue’s group manager of market positioning, Ben Kuchel, confirmed on Friday Fortescue had been in regular contact with CMRG over recent months, but told analysts on the company’s quarterly production call its remit appeared to go far beyond simply acting as a trading desk.
“It’s probably too simplistic to call CMR a single buying desk. I think it’s clear from their remit that they’ve got interests in many parts of the iron ore and steel industry,” he said.
“Those include resource development, the decarbonisation of the steel industry in China, as well a role to play in the supply chain linking iron ore from the world to China. In that sense their engagement with industry is quite embryonic and will be developed over time.”
New Fortescue sales, shipping and marketing director Vivienne Tieu told analysts the company’s engagement with CMRG had been “constructive”.
“Our strategy hasn‘t changed, and we’re focused on our customers’ needs and adapting how we run our business according to what drives the best value for Fortescue,” she said.
Fortescue broke fresh records in the December quarter, shipping 49.4 million tonnes of iron ore in the period, with Dr Forrest claiming the company had “never performed better”.
Fortescue’s shipments lifted 4 per cent compared to the September period, traditionally a slow quarter among Pilbara miners as major maintenance projects are run.
But Dr Forrest noted its December quarter performance put Fortescue close to a 200 million tonne a year export rate, even before its Iron Bridge magnetite mine comes into the system, expected by the end of March.
Sales of Fortescue ore realised an average $US86.93 a dry metric tonne, or around 88 per cent of the average benchmark price for ore grading 62 per cent iron.
The company said it finished December with $US4bn in cash, up from $US3.3bn at September 30 2022, with gross debt unchanged at $US6.1bn.
But the company also flagged another slight slippage on the timeline for its Iron Bridge magnetite project in the Pilbara, which will eventually deliver 22 million tonnes of high grade concentrate into the market.
After launching commissioning of the plant in late 2022, Fortescue had previously flagged shipments of about 1 million tonnes of concentrate before the end of June. It now says its first shipment will still occur this financial year, but less than a million tonnes of concentrate will be shipped.
Fortescue also updated its cost guidance for Iron Bridge, saying the project will come in at the top end of its $US3.6bn to $US3.8bn guidance range.
UBS analyst Lachlan Shaw said signs of further issues at Iron Bridge were “not surprising but may be seen slightly negatively”.
Mr Shaw said he expected Fortescue to pay a 67c a share dividend when the company reports its half-year financial results in February, but warned the company’s strong operational performance could be overshadowed in the second half of the year if its bullish view on an economic recovery in China is wrong.
“Fortescue’s very strong operational performance is overshadowed by weakening iron ore fundamentals, on UBS’ view for China‘s recovery to be consumption led and property stabilisation to be ‘L’ not ‘V’ shaped; and FFI returns and funding uncertainty,” he said in a client note.
Fortescue shares closed up 1c to $22.49 on Friday.
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