Shares in Andrew “Twiggy” Forrest’s iron ore miner Fortescue Metals slumped on Thursday as a steep decline in the spot iron ore price and lower production in the March quarter due to bad weather soured sentiment.
Fortescue shares were down 7 per cent, or 41.5¢, to $5.485 at 3.30pm, near six-month lows.
Chinese steel mills’ shift in favour of higher-grade iron ore continued. Photo: Getty-Images
The sell-off came amid the deepening decline in the market price for iron ore which has now slumped more than 30 per cent from its February high of $US95 a tonne, with the slide putting the share prices of all iron ore producers under pressure in sharemarket trading on Thursday.
BHP shed 4 per cent to $24.31 with Rio closing down 4.4 per cent at $59.15. Among smaller iron ore miners, Atlas Mining was one of the biggest decliners, trading down a heavy 14 per cent to 1.8¢, while BC Iron shed 12.5 per cent to 14¢.
The large drop in the iron ore price follows an upswing in shipments from Australian producers as the adverse effect of the March quarter wet weather receded, coupled with domestic production of the steel raw material also rising in China. Since the end of the northern winter, China’s output of iron ore has risen by around 50 million tonnes, annualised, according to Macquarie Bank data.
“Iron ore production in China has begun to recover post the winter curtailments and on the back of the more buoyant pricing outlook,” Macquarie analysts told clients in a research note. “The latest data suggests that the annualised production rate has recovered to just under 200 million tonnes per annum, up from the low in early February of 130mtpa.
“The average production rate for 2016 was 150mtpa.”
For Fortescue, which is now one of the top five iron ore exporters globally, the tonnage of iron ore shipped in the March quarter fell 6 per cent year-on-year to 39.6 million tonnes, declining by a similar volume from the December quarter.
Production costs rose 4 per cent to $US13.06 a wet tonne from the December quarter, although they were down 12 per cent from a year earlier.
More fundamentally, Chinese steel mills’ shift in favour of higher-grade iron ore continued, leaving its product to sell at a steeper discount, even though the price received was little changed at $US65 a dry tonne.
A surge in the price of coking coal has prompted steel producers to boost purchases of purer iron ore, to help offset the adverse effect of higher coking coal prices.
The price received in the December quarter by Fortescue, which produces a lower quality of iron ore, ran at only 76 per cent of the $US86 a tonne market price of ore grading 65 per cent iron.
Originally, Fortescue said its product would sell for 85 to 90 per cent of the market price of the higher-grade material, although it has now slashed that forecast to a more modest 75 to 85 per cent.
The price paid for the higher quality ore had surged, chief executive Nev Power said, while the price paid for Indian product, for example, “has gone down dramatically, but ours not so”.
“We will continue to see that volatility,” he said. “We expect the differential to ‘close-up’. We focus on the things we can control, and that’s margin – and we’ve been pretty good at that.”
Fortescue’s head of production, Greg Lilleyman, said the March quarter was “pretty tough” due to “very wet” weather.
Even with the heavy rain during the March quarter, Fortescue retained its full-year production guidance of between 165 million and 170 million tonnes, and lowering cash costs to between $US12 and $US13 a wet tonne.