FMG calls the bottom of iron ore price discounts
Fortescue Metals Group believes it has weathered the worst of the price discounts that have been applied to its iron ore in recent months, but will push ahead with plans to increase the average grade of its product regardless.
The miner revealed its iron ore had achieved just 66 per cent of the benchmark iron ore price during the three months to December 31; a far cry from the period between 2014 and 2016 when Fortescue's product typically fetched between 86 per cent and 88 per cent of the benchmark price.
The deep price discounts were driven by Chinese steel mills' preference for higher grade iron ore in recent months, which has arisen from a desire to operate more efficiently and stronger profitability, which enabled the mills to buy the more expensive, higher grade iron ore produced by miners like Vale and Rio Tinto.
But with steel prices and profits beginning to slide in recent weeks, Fortescue chief Nev Power said he believed the December quarter would prove to be the worst of the price discounts.
"We expect that to be about the low point ... the market is moving around a little bit but we are seeing improved results as we go forward," he said.
"The market conditions we are seeing are as a result of significant intervention in the market from the Chinese government so it was always expected that with that intervention coming to an end in March we would see the market rebalance. Steel mills will typically always look at minimising their cost of production and that tilts the market back significantly in favour of high value in use ores like our own."
Having received 68 per cent of the benchmark iron ore price over the past six months, Fortescue believes it will receive between 70 per cent and 75 per cent of the benchmark iron ore price over the year to June 30, 2018.