Iron ore and Coal

Fortescue Metals Group forced to offer even bigger iron ore discount in China

Fortescue Metals Group forced to offer even bigger iron ore discount in China
Mining News Agency - Traders have told The Australian Financial Review the discount for Fortescue`s December delivered product with 58.3 per cent iron content had increased to 29 per cent.
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Mining News - This is up from 25.5 per cent in November and compares to a discount of just 8.5 per cent in January.

The discount on its lowest grade 56.7 per cent product was stable at 40 per cent for December delivery, but up from 16 per cent at the start of this year.

Tougher pollution control measures across much of China during the winter months have pushed steel mills to favour higher grade iron ore, as less coking coal is then required in the steel-making process.

That helps lower emissions, while mills are also looking to produce the most amount of steel from their limited production capacity, which equally favours high grade iron ore.

Du Hongfeng, an analyst at industry consultancy Steelhome, said Fortescue was being forced to discount to maintain market share, a practice which was likely to continue until at least March next year.

"It`s like adding frost to snow [one disaster after another] for FMG`s low-grade products," he said via phone.

The increasingly large discounts being offered by Fortescue were also attributed to the fourth quarter being a strong production month, as Australian miners worry about weather interruptions in the first quarter.

 Mr Du said that, at a time of weak demand in China, the strong production volumes would put pressure on the iron ore price.

 Iron ore is trading around $US65 a tonne and while it is down 30 per cent over the year, the key steel-making commodity is holding up more strongly than most expected.

 But in recent months a large gap has opened up between high-grade producers like Rio Tinto, BHP Billiton and Brazil`s Vale and lower-grade producers, like FMG.

 This is set to continue in the years to come as Chinese authorities have said the current campaign against winter pollution will not just be for this season.

 "This campaign started in September and will last until March next year but it will not be a one-off," said China`s environment minister, Li Ganjie on October 24.

 "We will continue it in the following years as a long-term project. This campaign is not just a temporary measure."

 At Fortescue`s results briefing on October 26, Mr Power said the company averaged 71 per cent of the benchmark price for its iron ore during the September quarter, equivalent to an average discount of 29 per cent.

 But Mr Power said this average price realisation would widen to between 70 per cent and 75 per cent during the 2018 financial year.

 Mr Power and Fortescue have consistently argued the wider discounts are cyclical and not structural.

 "This is an artificially caused market condition. This is not some natural change in the market," he said at the results briefing.

 Last month Fortescue chairman Andrew Forrest linked the price chasm between high and low grade iron ore to the power of Chinese President Xi Jinping, arguing China`s policies had created a non-market distortion in iron ore prices.

 Despite Fortescue being forced to offer ever-increasing discounts to clear cargos, the company remains highly profitable as its costs in the September quarter were just $US11.65 a tonne.

 Fortescue`s lowest grade product has traditionally attracted a discount of between 5 per cent and 10 per cent.

 When the supply of iron is tight this discount tends to narrow as mills scramble to secure sufficient product to keep their blast furnaces running. The opposite was true in times of over-supply, but the market dynamic has changed dramatically with China`s winter pollution control measures.


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