Commodities | 11:10 AM
Fortescue’s weaker-than-expected quarterly update has heightened concerns over its pricing power, with China’s tougher negotiating stance threatening lasting consequences.
- Fortescue’s preliminary quarterly operational report disappoints
- Lower realised pricing reflects China’s growing bargaining power
- Ongoing dispute with buying agency over long-term offtake pricing
- Bell Potter sees an increasing shift in pricing power towards buyers
By Mark Woodruff
Macquarie recently identified Australia’s third-largest iron ore miner Fortescue ((FMG)) as the cleanest large-cap exposure to an anticipated near-term recovery in iron ore prices.
While acknowledging downside risks remained, the broker viewed any share price weakness arising from negotiations with China’s centralised iron ore buying agency as a buying opportunity.
That assessment preceded last week’s preliminary September-quarter operational update showing weaker-than-expected operations and cash conversion, though management maintained FY27 guidance, albeit subject to negotiations with China Mineral Resources Group (CMRG).
Recent media reports indicate BHP Group ((BHP)) agreed to offer a -1.8% discount on iron ore sales under its long-term supply agreements with CMRG.
For Fortescue, maintenance activity and planned port shutdowns weighed on shipments, but the larger issue now remain unresolved iron ore contract negotiations with CMRG over long-term offtake pricing.
Bell Potter warns any resolution is likely to come at a lasting cost to Fortescue, with lower realised prices becoming entrenched as growing iron ore supply and stagnant demand shift pricing power increasingly towards buyers.
Fortescue’s sales for the quarter came in -3% below consensus expectations of 44.4Mt and -8% below shipments of 46.8Mt due to restrictions on Fortescue cargoes.
Bell Potter highlights this is the first time management has disclosed a material gap between iron ore shipments and sales volumes.
UBS explains weaker-than-expected sales resulted in an inventory build, increasing working capital requirements, while lower volumes reduced fixed-cost absorption, placing pressure on unit costs and margins.
The analyst at Morgans has long argued Fortescue’s substantial investment in near-term loss-making magnetite and new energy projects has failed to diversify the business, instead increasing its earnings exposure to iron ore prices.
Magnetite adds higher-cost iron ore production, while new energy investments and -US$0.9bn-US$1.3bn in planned FY27 decarbonisation spending remain dependent on cash flow generated by the hematite business.
Fortescue’s traditional product mix is dominated by lower-to-mid-grade hematite iron ore, including Fortescue Blend, but the company is increasingly targeting higher-grade products.
Its Iron Bridge magnetite operation produces concentrate grading around 67% iron, while the Belinga project in Gabon, which has commenced trial mining and exports, offers longer-term potential for additional high-grade production.
Realised pricing
Around -3%-4% below market expectations of US$82.70/metric tonne (dmt), Fortescue achieved a September-quarter hematite realised price of US$80/dmt equivalent to 82% of the average Platts 61% CFR Index.
This compares with 84%, 89% and 90% in the preceding three quarters, Bell Potter highlights.
The company’s realised pricing mostly reflects the discounts management was forced to accept to sell its Super Special Fines (SSF) product, Ord Minnett suggests.
A blended product rather than the output of a single mine or project, SSF comes from the company’s Pilbara iron ore operations in Western Australia, principally its lower-grade hematite ore production.
Historically, it has been sourced principally from the Chichester Hub (Cloudbreak and Christmas Creek), with ore blending from other Pilbara operations. It typically grades around 56%-57% iron.
In the near term, lower pricing places pressure on operating cash flow (OCF) and Fortescue’s balance sheet as it ramps up Iron Bridge and funds decarbonisation initiatives, Bell Potter cautions.
Ord Minnett assumes Fortescue will conclude negotiations with CMRG by the end of 2026 but warns prolonged discussions could force management to revise mine plans, adjust stockpiling strategies and reconfigure parts of its supply chain to accommodate lower sales volumes.
Bell Potter also expects a resolution by the end of FY27, although the uncertainty adds risk to Fortescue’s guidance for the year.
For the moment, FY27 guidance remains unchanged at 197-207Mt of shipments and C1 costs of US$20.50-US$21.75/wet metric tonne (wmt), although both are now subject to the outcome of negotiations with CMRG.
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