The one body of sell side research that has the iron ore market right just now is Goldman Sachs. It has an average price forecast this year of $108 and $80 for next year. It also has a “sell” rating on Fortescue Metals. Today it digs into another potential developing problem for the miner that I’ve noted before, grade discounts:
The grade discount between 58% and 62% iron ore prices continues to widen. On our calculations the discount on spot prices is now as wide as 8% (vs 4% 6 months ago). As the iron ore market tips in to over supply in 2H14 – and the Chinese continue to seek better grade ore to placate the Government on environmental pressures – we believe that the grade discount could continue to widen.
Sub-60% iron ore accounts for around 22% of global seaborne supply with FMG accounting for c45% of the volume. We contend that the market for non-traditional grade ores may not be as deep as some would suggest, especially in an oversupplied market where buyer purchasing power and consumer discretion emerge. Thus FMG is at a natural disadvantage versus other iron ore players if the market moves in to a discount for low grade environment.
Concerns over grade discount, production profile, overall iron ore price and grade quality continue to support our non consensus Sell rating on FMG.
