A recent deterioration in profits among China’s steel producers is boosting the prospects of lower-grade iron ore producers such as Fortescue Metals Group, with steelmakers expected to shift their focus to reducing costs rather than boosting volumes if margins continue to decline.
A recent deterioration in profits among China’s steel producers is boosting the prospects of lower-grade iron ore producers such as Fortescue Metals Group, with steelmakers expected to shift their focus to reducing costs rather than boosting volumes if margins continue to decline.
Although profits in China’s steelmaking sector have rocketed in 2018, with margins for reinforcing bar (rebar) steel averaging between $159 and $198 per tonne for much of the year, and peaking at around $278, those figures had drooped off in recent weeks.
FMG chief operating officer Greg Lilleyman said rebar profit margins historically averaged about $39.75/t, with the high profits this year leading steelmakers to seek higher grade iron ore, which provides productivity benefits over lower grade product.
Mr Lilleyman said rebar profit margins had plunged in recent weeks, dipping below $79.50/t and trending downwards
He said as steel profitability started to decline, the behaviour of steel mills would return to what it had been previously.
“That means they will have much more of a cost focus, not just a production focus, and that our products, which have historically been lower (iron content) would likely come more into favour,” Mr Lilleyman told reporters in Port Hedland as part of the company’s 2018 Pilbara media and investor tour.
“We have a view that perhaps the steel mill margin deterioration isn’t necessarily driven by fundamentals of the market at the moment, there is a little bit of sentiment driving that, so we’re not sure exactly where the pricing will go, of course, but what we are seeing is the behaviour of mills acting as what we would expect them to do so.
“What that means is two things – being flexible with your product strategy and having the ability to move your products to suit the market conditions at a particular point in time is very, very important.”
FMG has been gearing up to deliver its first shipment of a new blend of Pilbara ore, known as West Pilbara fines (WPF), with the first exports expected to leave Port Hedland en route to customers in China in December.
WPF has an iron content of more than 60 per cent ferrous and reduced alumina content, characteristics that have been in high demand in the steelmaking sector.
Mr Lilleyman said FMG would ramp-up production of WPF to between 5 million and 10 million tonnes within the current financial year, to about 20mtpa by the time the company’s newest operation, the $1.75 billion Eliwana mine, comes into production towards the end of 2020.
He said the development of WPF was part of FMG’s strategy to bring its marketing and operations arms closer together to shape its export mix to better suit market dynamics
“We think the uplift in performance in the market from this product is going to deliver some absolutely stellar results in terms of the financial outcomes compared to our existing products and provide that optionality to match the products to market,” Mr Lilleyman said.
“The main thing is, it gives us a flexible product mix.
“I wouldn’t want to stand here today and say the smartest thing in the world in 2037 will be to produce this volume of this product and that volume of that. What it says is we have the option to do so, and we can flex very much up or down the volumes of each particular product depending on what’s happening around the world at that point in time.
“India is developing fast, so is South-East Asia; they may have different requirements for different quality products for different reasons, and the drivers in China will undoubtedly be very different in 20 years’ time than they are today.”
FMG sales and marketing director Danny Goeman said the introduction of WPF was also made in response to China’s supply-side reforms, which have featured a number of different initiatives to restructure the industry and reduce greenhouse gas emissions.
Mr Goeman said China had removed more than 140mt of induction furnace capacity in recent years, as well as 150mt of outdated capacity by replacing small blast furnaces with more modern plants.
Beijing has also driven significant industry consolidation, while steel mills have also been shifted away from major population centres to more favourable locations.
“All of those actions have obviously led to air quality in China in major cities improving,” Mr Goeman said.
“The focus on environmental controls will continue; this is a long-term thing, and it means that over time as mills install more environmental emissions controls that the industry as a whole will have more flexibility.
“We sometimes hear that there are more emissions from low-grade products; that is simply not the case, but even if it were so, the fact that the industry will have more flexibility and will have more environmental controls in place means they can actually use any product and still meet their emissions standards.
“That’s very important, that’s a very significant change going forward. What it means for our products and for other products as well is that the mills will have more flexibility and they will still be able to meet their emissions standards.”
Along with WPF, FMG is exploring the development of a magnetite operation in the Pilbara – called Iron Bridge – which would produce a concentrate at around 67 per cent ferrous and is Australia’s largest magnetite deposit at around 7.9 billion tonnes.
FMG chief executive Elizabeth Gaines said the company was working closely with its joint venture partners, Taiwan’s Formosa Group and China’s Baosteel, with an aim to make an investment decision on the operation before the end of 2018.
“We are still working through that process, but it is not our decision alone, it is with our joint venture partners, but we are working very hard to achieve that outcome,” she said.
• Dan Wilkie travelled to Port Hedland as a guest of Fortescue Metals Group.
