Mining and Heavy Industries

Price gap widening for FMG’s lower grade ore

Ship loading iron ore at Port Hedland. Photo: Fortescue Metals Group

Fortescue’s next chief executive will have to deal with a harsher discount on the company’s lower-grade iron ore, with analysts reporting a wider gap between the global spot price, and what FMG is getting for its ore.

Some of FMG’s iron ore is of a slightly lower grade than the 62% standard, often coming in around the 57% mark.

Despite being just five-or-so percentage points below the benchmark, FMG’s lower-grade ore has typically attracted discounts on the market of between 10-15%.

This gap widened further in FY17, with FMG reporting a discount of 23% in its annual report, trending towards 27% in the June quarter.

The miner said it expected a discount of between 20% and 25% in FY18, but conceded prices would be “slightly below the low end of guidance in the first half before increasing in the second half of FY18.

Through the start of the new financial year, the discount has reportedly widened further, to 32% in August, and a reported mark of 35% as recently as September 8.

UBS analyst Glen Lawcock reportedly told Fairfax he believes the wider discount figure will be a factor for the next five years, meaning “the benchmark price is no longer a good guide for the prices achieved by low-grade producers”.

FMG chief executive Nev Power reportedly told AFR the miner expects the discount to remain wide in the short term, but to return to a more reasonable figure in the longer term.

“[The large discount] is expected to continue in the short term while steel mill profitability, increased coking coal prices and iron ore port stockpiles remain at current high levels,” he was quoted as saying.

“In the longer term, Fortescue expects average price realisations to revert to historic levels as market conditio0ns normalise and steel mills maximise the value in use of their operations.”

The whole issue will soon be another person’s problem, though, after Power announced on September 15 he will step down on February 16, 2018.

FMG founder, chairman, and major shareholder Andrew ‘Twiggy’ Forrest said he was personally saddened by Power’s decision.

“Seven years from his commencement, Nev will hand over the reins,” Forrest said. “Over our 15 years of stable leadership with only two CEOs, a feature of our success has been the very strong, personal and professional relationship between chairman and CEO, driving the unique culture of our company.”

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