• Steel output in China remained at near record levels during the September 2017 quarter maintaining the strong demand for iron ore. Steel mill profitability has also remained at historically high levels and continues to incentivise blast furnaces to maximise production supporting the premium for higher grade iron ore. This has maintained the spread in prices between iron ore grades and these are expected to remain in the near term.
• The average realised price for contracts entered into during the September quarter, on a weighted product basis, was 71 per cent of the Platts 62 CFR Index at the time of contracting. The average benchmark Platts 62 CFR index price was US$70.90 per dry metric tonne (dmt). Based on current market prices Fortescue is revising its FY18 price realisation guidance to 70-75 per cent of the Platts 62 CFR index. In the longer term, as market conditions normalise, steel mills are expected to reduce their cost base by using higher value-in-use iron ore.
• Fortescue continues to generate strong cash margins from operations in the current market and is fine tuning its product strategies to further maximise value.
This is little worse than markets were expecting:
Prices may normalise a little as coking coal prices fall, allowing mills to use more lower grade ore, but it’s probable that 62% will then fall too as more 58% is used.
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.
