Iron ore’s price run not done yet, says Fortescue
Iron ore prices could stay stronger for longer as China chews through its port stockpiles at record rates says Fortescue.
Iron ore prices could stay stronger for longer as China chews through its port stockpiles at record rates, according to Fortescue Metals Group, with the iron ore miner hinting at a looming 28 million tonne market shortfall that could spur soaring prices even higher.
The benchmark iron ore price hit a fresh seven-year high this week of $US148.35, crossing the $200 in Australian dollar terms for the first time in a decade, as China’s steel mills approach their billionth tonne of production in COVID-hit 2020 and demand surges in the rest of the world,
Speaking at Fortescue Metals Group’s annual investor day on Wednesday, chief executive Elizabeth Gaines said the company saw no end in sight to this year’s record-breaking run as Australia’s iron ore producers shrug off tensions between Canberra and Beijing and rake in the cash.
Although Ms Gaines again warned the trade relationship with China needed nurturing, amid coal bans that have seen coal shipments to China all-but cease from major east coast coal ports in the current quarter.
But Ms Gaines said there was no sign of the tensions infecting Fortescue’s “multifaceted” relationship with its Chinese customers, which supplied close to 95 per cent of the company’s iron ore revenue last year, and collectively buy about 87 per cent of Australia’s iron ore output.
And, with little sign of iron ore’s Santa rally halting, Fortescue marketing boss Danny Goeman suggested that China’s drawdown of port stockpiles over the last three weeks – port inventories fell 1.6 million tonnes last week to stand at 128.7 million tonnes – was set to continue through into the new year, perhaps to critical levels approaching 100 million tonnes.
“Feedback from our customers and other industry observers in China in the last few days suggests that the ongoing strength in steel demand may lead to iron ore inventories in China ports being drawn down further, with some suggesting that port levels may approach 100 million tonnes during the first quarter of 2021,’’ Mr Goeman said.
China’s port inventories are closely watched by iron ore market observers, as they can be a key indicator of price movements.
Falling port inventory levels, at a time when steel mills are traditionally restocking ahead of the wet season in Australia and Brazil, when exports can slow due to the impact of cyclones and severe rain, suggests the current iron ore price may have some distance to run.
Mr Goeman told analysts strong steel production levels in China were helping drive a market shortfall, as was lower-than-expected output from major Brazilian producers including Vale.
“As for the rest of the world we are now seeing a gradual recovery in steel production levels in many countries – India, Japan, South Korea and south east Asia have all seen improvements in crude steel production rates and we anticipate further recovery in the near term,” he said.
“Recent feedback from our customers in Japan and Korea also highlights the recovery in steel demand there, with both POSCO and Nippon Steel confirming they are restarting blast furnaces to meet increased demand.”
While iron ore prices will eventually moderate as miners across the globe ramp up output to take advantage of the price, Mr Goeman told analysts China has still not hit peak steel production, and Fortescue was not concerned about any immediate threat from increased Brazilian supply, nor from suggestions China could ramp up its use of scrap steel to feed its blast furnaces.
December’s iron ore spike has been partly spurred by yet another production downgrade from Vale, with the Brazilian major cutting 2020 output expectations, and flagging a far lower than expected return to higher output levels in 2021.
Last week it cut 2020 production guidance to a range of 300 million to 305 million tonnes, down from previous expectations of between 310 million and 330 million tonnes, and said it expected 2021 output to rise to between 315 million and 335 million tonnes – far lower than market expectations.
But Mr Goeman said Fortescue had doubts that even current expectations of returning Brazilian output would be met.
“We envisage significant ongoing challenges associated with expansions of Brazilian supply, particularly given the number of projects requiring completion and the related project approvals,” he said.
Last year Fortescue averaged a $US52 a tonne margin on a realised iron ore price of just under $US80 a tonne for its iron ore shipments.
At today’s price that margin is likely to be closer to $US100 a tonne, suggesting the rivers of cash will continue to flush through its coffers even despite the $US3.4bn it will spend on building new mines this financial year.
A share of that cash will also flow into the WA and Federal treasuries, as royalty and company tax receipts help offset some of the budget damage inflicted by the coronavirus pandemic.
Fortescue shares hit a fresh high of $21.81 on Wednesday, before closing at $21.80 for the day – up 34c from Tuesday. BHP shares also closed up, adding 48c to $42.73 after hitting an intraday high of $42.94. Rio shares closed up 42c to $115.44.
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