Chinese interest muddies iron ore picture

The Fortescue founder and chairman wrote a lengthy opinion piece in The Australian this morning, after his calls for a Parliamentary Inquiry into the iron ore market drew scepticism from politicians, the media and his competitors last week.

Forrest addressed concerns that an inquiry would make Brazilian giant Vale more competitive than Australian producers when exporting iron ore to China.

“Much has been made in the Australian press about a photo opportunity [Chinese] Premier Li enjoyed around a deal announced more than eight months ago for Chinese funding of four of the iron ore ships called Valemax,” Forrest wrote.

“Vale already has 40 of these ships in its fleet as it works to address its uncompetitive freight disadvantage versus the Pilbara.”

Forrest slammed speculation that this deal will put Australian producers in a position where an inquiry could see them lose ground to Vale.

“The freight disadvantage is the reason why both now and for the foreseeable future, Vale has higher delivered costs to the customer than any of the big Pilbara producers, including Fortescue,” he argued.

“To compare with Vale, Fortescue’s break-even price next quarter … will be an index price (all in costs and adjustment for price realisation) of US$39 a tonne.”

That figure is down significantly on the roughly US$53 a tonne break-even quoted in several media sources over the past six months, a factor Forrest credits to a “very successful cost-reduction journey” undertaken by the iron ore miner.

And while Fortescue’s still not going to produce iron ore at the rate of its competitors BHP and Rio (both below US$30 a tonne break-even), that production indicates the miners are safe from proper competition from Brazil, even if there is an inquiry, Forrest says.

“On its most recent quarterly call, Vale confirmed its break-even price was an index price of US$45,” he compared.

Forrest’s renewed push for an inquiry into iron ore comes as Chinese interests reportedly line up to invest in Fortescue.

A number of applications with the Foreign Investment Review Board over the last seven days have suggested that some Chinese players – including major steelmaker Baosteel – could be ready to acquire a significant portion of the company.

The news was broken by veteran NewsCorp journalist Laurie Oakes, who reported on Sunday the “possibility of significant upheaval in the iron ore industry and ownership of sections of it over the next 12 months.”

Baosteel is involved in a joint venture with Australian rail business Aurizon to construct an iron ore mine and railway in the south west part of the Pilbara, but that plan has been delayed by the sinking iron ore price.

Since dropping from roughly US$140 a tonne at the start of 2014 to below US$50 a tonne earlier this year, the market price has stabilised around US$60 a tonne in recent weeks.

Forrest, who has been in the media frequently throughout that decline for a number of reasons, has indicated that a strategic investment from an outside party could be in the best interests of Fortescue going forward.

As a steelmaking business, Baosteel would fit that description.

Fortescue’s shares jumped 15% on Tuesday amid speculation of a potential investment, peaking around $2.40 a share.