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Fortescue warns of greater volatility in iron ore

service@ironoreteam.comTue May 23, 2017 09:16am GMT

One of the world’s largest producers of iron ore has warned that the steelmaking ingredient may need to fall further to counter the effect of a glut of Chinese supply that has made it one of the worst performing commodities of the year.

The iron ore price has tumbled from around $95 a tonne in February to $60 today, reflecting mounting stocks of lower grades of material at China’s ports. This year’s decline is a “significant price signal”, said Nev Power, chief executive of Fortescue, the world’s fourth-largest producer. “I think at $60 a lot of that additional production will start to exit, but if it doesn’t exit as quickly enough to rebalance the market then we could see more volatility.’’ The market is grappling with a build-up of lower-grade iron ore in China, as a rising steel price prompts manufacturers to use a higher-grade variety that allows them to produce steel more speedily. Inventory of iron ore at China’s ports rose to a record 136m tonnes on Friday, according to data from SteelHome. Iron ore prices have slumped by just over a fifth this year, with particularly sharp falls in March and April. That is in sharp contrast to other commodities, including copper and aluminium, which are also heavily dependent on China and have advanced so far in 2017. As steel supply increases to meet demand, a weakening in prices will lead steel mills to use lower-grade iron ore and help reduce port inventories within three to six months, Mr Power said. A lot of the port stocks are used to secure trade financing or are held by large traders, which means the unwind is likely to be gradual, Mr Power added. “We think people will want to see a more orderly reduction in those stocks,” Mr Power said. “Rather than it happen sharply.” Analysts at Barclays note that “iron ore port stock volumes are generally viewed as of low quality and, when steel prices are high (and mill profitability is high) they are disfavoured relative to higher-quality lump and pellet ores.” Steel rebar prices in China are up 17 per cent this year, boosted by efforts the government has made to crack down on pollution by curbing production. Shares in Fortescue, which produces around 160m tonnes a year and competes against Rio Tinto, BHP Billiton and Vale, are down 23 per cent over the past three months, but are up 77 per cent over the past year. The company, which used debt to fund a $9.2bn expansion over the past few years, refinanced some of that debt this month with a $1.5bn bond. The company’s net debt is estimated to fall from $5.19bn in 2016 to $2.7bn this year, according to analysts at Credit Suisse. “That strategy is now paying enormous benefits for us, since we are able to very quickly de-gear the company,” Mr Power said. Fortescue is also trying to diversify away from iron ore through exploration in Australia and Ecuador. It is currently examining its reserves of lithium, a key metal for batteries, on its tenements in the Pilbara, Mr Power said. “We’ve got some lithium but is it big enough to be something we sell on to others or develop ourselves, I don’t know at this stage,” he said.