Fortescue tests new iron ore price discovery frontier

Fortescue Metals will test a new frontier of iron ore price discovery with plans to run auctions on the same digital system that stunned lithium markets this year by enabling Pilbara Minerals to sell its product at more than double the industry benchmark price.

Fortescue has struck a preliminary deal with disruptive commodity trading platform provider GLX Digital to sell iron ore on the “GLX Connect” platform, and Fortescue will become a small shareholder in the star-studded technology company if the deal is formalised.

The issue of shares to Fortescue would see the iron ore miner join the private companies of Fortescue chairman Andrew Forrest on the register of GLX Digital, alongside oil and gas giants Woodside and Shell and Alex Waislitz’s Thorney Investment Group.

GLX Connect empowers the seller by allowing it to design and manage its own auction terms on a digital platform and retain the market information obtained in the bidding process.

Originally created for the trading of liquefied natural gas (LNG) and oil, the platform removes the traditional intermediary between the buyer and seller and enables the seller to manage counter-party risk by choosing who is invited to participate in auctions.

The advantage handed to sellers using GLX Connect was demonstrated by Pilbara Minerals’ second auction on the platform in September, when a single, small batch of lower grade lithium-rich spodumene concentrate sold at the extremely high price of $US2240 per tonne.

Price reporting agencies had put the spodumene concentrate price around $US900 per tonne at the time, and the bumper price achieved by Pilbara demonstrated the power of being able to set the precise terms – including volume and delivery schedules – of an auction.

Access to GLX Connect will cost Fortescue $US100,000 a year under the terms of the three-year deal, which has not yet been finalised.

Fortescue will be issued a small shareholding – less than 1 per cent – in GLX upon formalisation of the deal and will earn further shares as it conducts auctions on the platform.

Fortescue confirmed the deal but said it would put small volumes through the platform initially.

“Fortescue is exploring the potential to trial new platforms to complement our existing sales and marketing channels. The majority of Fortescue’s products will continue to be sold via existing contractual seaborne arrangements, as well as our portside sales entity FMG Trading Shanghai,” said a spokesman for the iron ore miner.

The GLX Digital deal comes as the marketing side of Fortescue’s business becomes more complex; the company now sells at least six iron products including a higher grade product designed to mitigate the impact of price penalties on the company’s lower grade products.

The company may introduce another new product within 13 months when its troubled Iron Bridge project is expected to start selling a magnetite concentrate with iron grades above 67 per cent.

Fortescue has also established a beachhead at Chinese ports, enabling it to sell much smaller volumes of iron ore to a new range of customers that do not want to buy iron ore in the large volumes sought by major steel mills.

Some of the trades executed by Fortescue’s portside trading beachhead in China are executed in renminbi rather than the standard currency for the iron ore industry, US dollars.

The big Australian miners sell iron ore on a mix of daily market and longer-term contract prices, with some trades including shipping costs while others do not include the cost of shipping to the customer.

S&P Global Platts surveys iron ore market participants to determine the industry “benchmark” price for ore with 62 per cent iron – including shipping costs – and the benchmark price was $US96.65 per tonne on November 26.

To boost uptake in the LNG industry, GLX reduced governance requirements on its “GLX Connect” platform this year, including by making trades non-binding and therefore subject to a secondary confirmation between the seller and buyer.

GLX Digital was founded by former Shell lawyer Damien Criddle, who remains the biggest shareholder with close to 25 per cent.

The board of the privately held GLX Digital is chaired by Reserve Bank director and Fortescue deputy chairman Mark Barnaba and included Woodside chief executive Meg O’Neill until she resigned this month.

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