Fortescue sees iron ore demand boost as China closes steel mills

1 February 2017

A Chinese crackdown on inefficient steelmaking will support demand for iron ore imports, Australia's Fortescue Metals Group said on Wednesday, maintaining its forecast for record shipments this year amid a rebound in prices.

Exports to China by the world no. 4 iron ore miner dipped slightly in the quarter to Dec. 31, quarterly production data showed, but are still on track to meet or beat the high end of its 2016/17 guidance for 165 million to 170 million tonnes.

Iron ore was one of the best-performing commodities in 2016, defying analyst forecasts for a correction on the back of plentiful supply and an expected slip in demand from China, the world's biggest buyer.

A push by Beijing to do away with high-polluting and low efficiency electric arc furnace steel mills, which use scrap steel rather than iron ore, will help miners, Fortescue chief executive Nev Power said.

"This translates into 40-50 million tonnes of iron ore," Power said. "We are very confident that the substantial numbers will be replaced by integrated steel mills,"By some industry estimates, mini-mill steel production could be as high as 100 million tonnes a year, nearly 10 percent of China's total capacity.

The expected increase in demand could help offset expectations that record Chinese imports of just over 1 billion tonnes in 2016 would contract this year.

However, Power cautioned that the iron ore market would take even an additional 50 million tonnes of demand "in its stride", as Fortescue and larger rivals such as BHP Billiton and Rio Tinto operate at maximum rates.

The newly built Roy Hill mine neighboring Fortescue in Australia's Pilbara mining district alone is getting set to produce up to 55 million tonnes this year.

For the December quarter, Fortescue's cash production costs fell by 7 percent to $12.54 a tonne from the previous quarter and were down 21 percent on a year earlier, the company said.The final cost for Fortescue of mining and shipping its ore to China stands at around $24 a tonne, Power said.

Spot iron ore prices surged 81 percent last year and are currently around $80 a tonne, despite analysts' forecasts for a contraction to around $55.But forecasters remain concerned that millions of tonnes of additional low-cost supply from Australia and Brazil will soon send prices into retreat.

A Reuters poll in mid-December put the average price of iron ore at $54.70 per tonne in 2017.