Fortescue Metals Group has dismissed concerns about oversupply in the iron ore market, taking the view that a prolonged commodity crash is finally giving way to a cyclical upturn.
The Australian iron ore miner — which a year ago was struggling amid dwindling iron ore prices — is one of a host of global resource companies enjoying a surge in their share price due to a spike in commodity prices this year.
“We think there is stability in demand in China and most of the new large volume supply has already come on to the market,” said Nev Power, Fortescue chief executive. “The commodity market is cyclical and there is no reason to expect we won’t see a continuation of that.”
There is stability in demand in China and most of the new large volume supply has already come on to the market
- Nev Power, Fortescue chief executive
Shares in Fortescue, the world’s fourth-largest iron ore producer, have tripled to A$5 this year, from a low of A$1.37 hit in mid-January as iron ore prices fell below US$40. Shares in BHP Billiton, Rio Tinto, Glencore and Anglo American have also rallied as the prices of most commodities have begun rising due to stronger demand from China and a tightening of supply.
“The stimulus provided by the Chinese government is part of the story,” said Mathew Hodge, analyst at Morningstar. “But we have also seen supply disruptions in the iron ore market and coking coal markets.”
The price of premium hard coking coal, a key ingredient in steelmaking, has doubled in six weeks to US$200 a tonne following production curbs ordered by the Chinese government aimed at bolstering its domestic mining industry.
The price of iron ore, another key ingredient, has jumped more than 30 per cent this year to US$56 a tonne, with Chinese stainless steel production up 7 per cent year on year, according to a presentation by Glencore to investors last month. Weather-related disruptions and an accident at a Brazilian iron ore operation have also hit supply.
The improving sentiment across the resources sector has prompted Barclays to conclude that the outlook for commodities is more positive than it has been for some time. “We expect commodities to avoid their recent pattern of fourth-quarter price crashes,” Kevin Norrish, Barclays analyst, wrote in a note to investors last week.
However, some forecasters say the iron ore market remains fragile because of persisting oversupply, and are predicting a fresh fall in prices.
Citi reckons Brazil and Australia will add about 200m tonnes of iron ore to the market by 2020, deepening a global glut and denting prices. That projection followed a similarly bearish outlook from Liberum Capital last month.
Mr Power said some forecasters were overestimating the speed at which new supply would materialise.
“The iron ore market over the last while has been in supply-demand balance and for every new tonne of low-cost supply that comes on to the market, we have seen high-cost supply exit,” he said.
He said long-term iron ore demand and therefore the price of the commodity would be determined by Chinese economic policy and the rate of growth in emerging economies across Asia: “The demand side will be much more important than new supply.”
Chinese demand for iron ore looked solid, he said, noting signs of a shortage of housing and strong growth in infrastructure and automobiles.
In a sign of its growing confidence in its financial position and the iron ore market, Fortescue this year has paid off US$700m in debt. It reduced net debt from US$7.2bn to US$5.2bn during the financial year to June 30.
“Our gross gearing is just above our 40 per cent target at the moment but we expect to get there during this financial year,” said Mr Power.
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