Bulk Buys: Would you bet against Andrew Forrest and FMG on iron ore?
Andrew Forrest said he wouldn’t bet against the price of iron ore this week as he addressed media and analysts in a lap of honour for Fortescue Metals Group’s (ASX:FMG) transformative 2021.
That was driven by record high iron ore prices through the first half of the year, which tipped some US$10.3 billion worth of profits into the company’s coffers and lined Forrest’s own pockets with $4 billion of the company’s record $11 billion dividend splurge.
With 10% of profits from FMG’s iron ore profits heading into green energy play Fortescue Future Industries, it is also bankrolling Forrest’s apparent ambitions to lead the world single-handedly away of the looming catastrophic impacts of climate change.
The leader of what is now known as the “third force” in Pilbara iron ore behind Rio Tinto (ASX:RIO) and BHP (ASX:BHP), Forrest has responded to a recent slide in the iron ore price with the same strident gusto as he has brandished his newfound renewables, green hydrogen and green steel zealotry.
“I really want to meet the successful commodity price forecaster who doesn’t use a rear-vision mirror,” he told media on Monday.
“So have we seen the best days? I don’t know. But I certainly would say that I wouldn’t bet against the commodity price of iron ore.”
The big driver seems to be environment related steel production cuts the Chinese Government has impressed upon steel factories to bring the price of Australia’s biggest export commodity down.
Gaines was quick to note the price remains historically high, especially when weighed up against the US$15-15.50/t unit costs Fortescue generates to extract the product from the Pilbara dirt.
Fortescue produced a record 182.2Mt of iron ore in FY21 and expects to produce 180-185Mt in 2021-22.
Gaines told analysts on Monday she thought some of the impacts on steel production in China, which dominates the end market for iron ore with around half of global output, were only temporary.
“Look I think there’s no doubt obviously iron ore prices have moderated from the record highs and in recent weeks we have seen that price correction,” she said. “We think that’s influenced by some weaker than expected macroeconomic data in China as well as the implementation of curbs on crude steel production.
“We think there’s also been some transitory factors that have influenced that, so the weather disruptions, the COVID outbreak and most of those we see will dissipate over the coming months.
“So, we’re expecting a seasonal rebound in steel demand for the fourth quarter of 2021, particularly in the construction sector.”
Steel production in China was up almost 12 per cent year to date between January and June and was still 8 per cent above 2020 levels at the end of July, with many analysts believing China will struggle to reach its stated aim of reducing steel production enough in the second half to keep steel output flat year on year.
FMG still predicts steel output will end up year on year.
“It’s hard to predict exactly what, but there is still constrained supply, we’re seeing strong ongoing demand, steel exports are remaining at pretty robust levels, we haven’t seen a reduction in steel exports,” she said.
“So overall, we’re still seeing the same market environment which is some volatility in recent times but overall, we expect to see some strong rebound in the fourth quarter of this year.”
Stronger buying over the past week saw most companies on our Bulk Buys watchlist post a one week gain, with the iron ore dominant companies led by juniors Fe Limited (ASX:FEL), Magnum Mining (ASX:MGU), Reedy Lagoon (ASX:RLC), Strike Resources (ASX:SRK), Venture Minerals (ASX:VMS), Magentite Mines (ASX:MGT) and Genmin (ASX:GEN), who were all up more than 10%.
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Goldman Sachs is not feeling FMG, maintaining its sell rating despite its record profit.
Goldman Sachs Australia analyst Paul Young has FMG down as a sell on the basis that its valuation on a price x NAV basis is around double that of its peers (1.7x to Rio’s 0.85x) and uncertainties around how the green energy push will turn out.
Fortescue has also long suffered from price discounts compared to its peers because it sells lower grade 58% iron ore.
These narrowed to 84% of the benchmark price in the June Quarter as steel mills grabbed all the iron ore they could get their hands on.
But Young said FMG now appears to be fetching around 75% of the benchmark 62% iron ore price, “with likely further headwinds as China cuts steel production in 2H.”
Fortescue is pumping serious dough into the Iron Bridge magnetite project 145km south of Port Hedland, which FMG is pushing on with despite a US$1billion blowout to a capex of US$3.3-3.5 billion.
The mine would address some of FMG’s grade issues, by supplying 22Mtpa of high grade 67% magnetite concentrate to add product which draws a premium to its exports.
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One area where Forrest has been particularly bullish is Fortescue’s proposed green iron ore and green steel products, which FMG believes will garner a premium from customers looking to reduce their carbon footprint.
As prices for imported coking coal in China have soared to records of more than US$400/t, amid a ban that has redirected Australian product to other Asian countries and Europe, analysts are asking whether coking coal will be replaced down the line in the steelmaking process.
“Coking coal stands to lose the most amongst the raw steel making ingredients as the steel sector looks to decarbonise,” Commbank analyst Vivek Dhar said in a note yesterday.
“In the International Energy Agency’s (IEA) Sustainable Development Scenario (SDS) from the group’s 2020 annual report, it was forecast that coking coal trade would contract by a third from 2019 to 2030.
“This scenario only looks to meet the Paris Agreement (limit global warming to well below 2°C relative to the pre-industrial age) and implicitly targets net zero emissions by 2070.
“A more ambitious decarbonisation goal, such as net zero emissions by 2050, would mean a faster reduction in coking coal trade.”
The Chinese steel sector is looking to hit peak emissions by 2025 and reduce its emissions by 30% by 2030.
Dhar believes rising scrap steel usage and a shift to electric arc furnaces could also reduce the need for iron ore and coking coal, the key reducing agent in traditional blast furnace steelmaking.
However, a number of experts have questioned these sorts of theories.
Speaking to Stockhead’s Reuben Adams, S&P Global Platts Analytics head of coal and Asia power Matthew Boyle said: “I don’t see [hydrogen] as a real threat to coking coal,” Boyle says. “Certainly not anytime soon.”
“It’s very much early days for green steel initiatives and the steel industry will continue to be iron ore and coking coal based for decades to come,” he said.