The Fortescue lap of honour continues today at the AFR:
Fortescue Metals Group has improved its resilience to lower iron ore prices and now has the ability to retain its credit rating even if prices crashed about $US20 per tonne, S&P Global Ratings says.
The credit rating agency revised its outlook on Fortescue to “stable” from “negative” on Monday and affirmed its “BB” corporate credit rating on the company and the issue ratings on its debt.
It came as agency Fitch Ratings also affirmed its long-term issuer default rating at “BB+'” and revised the outlook to “stable” from “negative”. Last week Moody’s upgraded Fortescue’s corporate family rating to Ba2 from Ba3.
Fortescue Metals Group has almost made a sport out of setting what appears to be unrealistic targets and smashing them.
For a decade the ambitious iron ore miner has been dogged by sceptics. For a decade it has beaten the odds.
While there may be questions about how sustainable some of its initiatives are there is now little doubt that Fortescue has finally become unshakeable.
Let’s examine that assertion.
The Asian seaborne iron ore market is about 1.2bn tonnes today. Roughly 80% of that is China. 20% is Japan and Korea. Over the next decade Chinese steel output will fall by around one quarter to 600mt. Let’s be very generous and say that scrap only rises to 100mt of that. That leaves 500mt of steel for blast furnaces which equates to 770mt of iron ore. Chinese iron ore output is falling but it’s clearly not going to zero so let’s again be generous and say that 100mt is sustained (roughly half that of today).
Japan and Korea won’t grow, India and Africa are self-sufficient. So let’s assume that the total Asia seaborne market only shrinks to 900mt.
Conservatively, within three years the big three will have operational capacity for Asian delivery of 940mt with VALE at 300mt, RIO 360mt and BHP 280mt, all of it cheaper than FMG. There is another 200mt in juniors of which let’s say half drops out. The other half will likely be sustained owing to strategic decisions about diversity of supply, captured mines etc.
That leaves total capacity for Asia at 1.07bn tonnes versus demand of 940mt before we include FMG’s 165mt.
That’s not to say that it can’t hobble on. It’s become very good at it. But note in the above chart that the key to its success is a short term high-grading strategy that at some point snaps back to much higher overburden ratios, all the more so for digging into the cheaper ore earlier. The same will not happen to the big three.
It really doesn’t matter how you cut these numbers. You can give wider Asia more demand growth or cut more non-traditional supply or you can lower scrap’s market share. But once you accept that Chinese steel output is going to fall by one quarter then FMG is rendered a temporary business, a figment of the boom, gone when it is, no matter what it does.
It could end up a shrinking division of Vale, some Chinese SOE, RIO or BHP but it remains univestable in any long term equity sense.
It remains what it always has been: a brilliant China bubble derivative.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
