China’s crackdown on pollution, “subdued” Chinese construction activity and global trade tensions have forced Twiggy Forrest’s Fortescue to lower its iron ore price guidance for fiscal 2018.
Fortescue released the updated guidance on Tuesday, saying there had been a “slower than anticipated recovery in contractual realisations”.
The iron ore miner said it now expected to receive prices equal to about 65 per cent of a widely accepted industry benchmark price for fiscal 2018.
Five weeks ago when it released half-year results Fortescue said it was on track for “price realisations” of 70-75 per cent of the benchmark, but qualified this by saying it was “based on current market expectations”.
Fortescue’s announcement did not surprise industry observers, nor did it particularly seem to surprise investors, with the stock easing just three cents to $4.58. However, other iron ore miners and the ASX200 rose on Tuesday.
The restrictions on industrial production in China – combined with strong steel margins – have seen Chinese steelmakers favour ore with higher iron grades, for which they pay higher prices, in order to maximise steel production.
Fortescue sells ore with iron grades of about 58 per cent, which attracts a lower price than the industry benchmark price.
The Chinese crackdown on pollution has effectively helped fellow miners like Vale, and Australian producers Rio Tinto and BHP, which sell iron ore with a higher iron grade than Fortescue’s.
In a note released after the Fortescue statement, Citi downgraded Fortescue to sell. “After allowing for higher discounts that look increasingly structural we downgrade our Fortescue recommendation to sell with a target price of $4.10 per share,” Citi said. Previously it had a buy recommendation with a price target of $5.40.
“With blast furnace utilisation in China running at 80 per cent, and expected to remain at this level due to steel sector reform, we assume that the increase in low-grade discounts from 10-15 per cent historically to 35-40 per cent now is two-thirds structural and one-third cyclical,” Citi said.
Commonwealth Bank mining & energy commodities analyst Vivek Dhar said in a note: “Falling Chinese steel margins should see mills look to lower iron ore grade, but a structural preference for mid-to higher-grades should remain as policymakers push for more productivity and lower emissions from the industrial sector.”
Fortescue said its first half revenue realisation “was 68 per cent of the average Platts 62 CFR Index (industry benchmark price). Full year revenue realisation remains subject to movements in the Platts 62 CFR index price and associated mark to market adjustments.”
It also expressed optimism about future price movements. “As market conditions stabilise, price realisation as a percentage of the Platts 62 CFR index is expected to increase,” it said.