I am a big fan of Fortescue Metals. It has built an epic sized business in record time and gone head-to-head with Australia’s most powerful duopoly in the process. Andrew Forrest is clearly a man of generous heart and his CEO, Nev Power, one of the least egregious executives in the country.
I therefore have some understanding for the soft spot that the AFR’s Jennifer Hewitt carries for the big miner. Today she sympathetically quotes our Nev:
Nev Power from Fortescue Metals Group points out, for example, that Chinese steel production is at record levels of 2.3 million tonnes a day. FMG’s chief executive does concede some concern at what he sees as the unintended consequences of the Chinese government’s determination to keep tightening up private trade credit and financing.
The Chinese authorities took action because some private traders in China have been using the same stockpiles of commodities such as iron ore as security for different borrowings from different financiers. The determination to stop this practice by tightening credit rules has been in effect for a few months. But Power warns the impact is cumulative.
“It’s like a python squeeze,” he says. “It’s affecting the ability of the whole private sector to get trade financing. Most still can obtain it but it takes a lot more time and effort.
“The state mills and traders are not affected, but it’s undermining confidence in the private sector, which is responsible for around 50 per cent of steel production.”
Fair enough. But I am beholden to point out that this consequence is very much intended. Such is evidenced by the prudential tightening aimed directly at the steel ponzi borrowers cited. China is not FMG’s friend and after being gouged mercilessly by its bigger brothers for the past decade, it is pay back time.
Goldman has a firmer grasp of the realities, even if it is the only one:
Goldman Sachs is forecasting iron ore to average $US105 per tonne in the September quarter, before a decline to $US100 per tonne in the December quarter. But as global supply continues to ramp up, Goldman Sachs expects to price of iron ore to plunge in 2015, averaging $US80 per tonne.
“At $US80 per tonne it does become close to [mid-cap miners’] breakeven. Generally their business models have been a derivative of the fact that we’ve had higher iron ore prices for the last six or seven years,” Goldman Sachs analyst Craig Sainsbury said.
Factor in grade discounts that might occur because smaller miners generally have lower quality iron ore, and many single metal miners face a tough road.
“The grade discount is something people may forget. You can look at the spot price and say ‘it’s only $97.50 and that’s not low’ but off that price, Fortescue is receiving about $72 at the moment, by the time you work through the grade discount, the impurities, moisture and shipping,” Mr Sainsbury said.
Goldman is the only broker that has a “sell” recommendation on the stock.
