Iron ore price penalties back to haunt Fortescue

The price penalties imposed on Fortescue Metals’ iron ore rose for the third consecutive quarter, as the fading of the iron ore boom hits Australian producers of intermediate and lower grade products.

Over the past three months Fortescue received 73 per cent of the industry “benchmark” price, which reflects ore with 62 per cent iron.

That result was a far cry from the final three months of 2020 when iron ore markets were tighter and the company received 91 per cent of the “benchmark” price.

Fortescue has always received less than the benchmark price because the vast majority of its products contain between 56 per cent and 59 per cent iron, but the size of the penalty has varied dramatically over the years in line with supply and demand factors in the iron ore market.

Fortescue was plagued by significant price penalties through 2017 and 2018, and the trend appears to be returning amid abundant supply of lower grade iron ore and astronomical coking coal prices, which indirectly incentivise steelmakers to prefer high grade iron ore.

The return of significant price penalties came as Fortescue exported 45.6 million tonnes of iron ore in the three months to September.

That export performance was 3 per cent better than the same period of last year but 8 per cent below the volumes shipped in the three months to June.

The export rate has Fortescue on track to deliver its promise to ship between 180 million and 185 million tonnes in the year to June 30, 2022.

Unit costs over the past three months were 20 per cent higher than the same time last year, reflecting the severe inflationary pressures in Western Australia’s Pilbara iron ore heartland.

Those unit costs do not include the cost of shipping ore to Asia, which also blew out dramatically in recent months.

The price penalties suffered by Australian miners have been back in focus over the past three months, culminating in Mineral Resources’ disclosure on Tuesday that it had received just 48 per cent of the benchmark price over the past three months.

Mineral Resources result was exacerbated by some abnormal shipping delays and timing issues, with analysts saying realisations would have been closer to 75 per cent had those factors not been in play.

But even allowing for those abnormal factors, Mineral Resources’ price realisations were weaker than analysts had expected, prompting a 9 per cent slump in Mineral Resources shares over Tuesday and Wednesday as analysts downgraded earnings forecasts.

Fortescue received 89 per cent of the benchmark price in the three months to September 2020.

Price realisations have been steadily declining since Fortescue received 91 per cent of the benchmark iron ore price in the final three months of 2020.

The company received 86 per cent in the first three months of 2021 then 84 per cent in the three months to June.

The evidence of the past four weeks suggests the trend is likely to continue.

The industry’s preferred price provider, S&P Global Platts, said ore with 58 per cent iron was fetching $US75.75 per tonne on Wednesday; a price that was 63.3 per cent of the benchmark iron ore price.

The 58 per cent index published by S&P is not an exact guide for Fortescue’s price realisations, but it is a reasonable guide, and provides a clear indication of the trajectory of price penalties.

The rising price penalties highlight the importance of Fortescue’s vow to ensure “the majority” of its exports contain ore with more than 60 per cent iron in future.

That 2017 promise would mitigate the impact of price penalties, but progress toward delivering it appears to be going slowly on the back of cultural heritage complications and delays in delivering the Iron Bridge magnetite project.

Fortescue has not published a target date for delivery of that 2017 promise.

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