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Fortescue downplays Chinese iron ore ‘volatility’ fears

Mining giant Fortescue is confident China’s demand for iron ore will persist despite concerns of a slowdown in Chinese steel production due to the simmering trade war with the United States.

Australian miners of iron ore – the nation’s biggest export and the key ingredient for making steel – have delivered bumper profits this month on the back of a booming price of the commodity driven by strong demand from Chinese steel mills and elevated prices for iron ore amid a global supply shortage.

While BHP and Rio Tinto warned investors they were bracing for challenges in the coming year partly due to the US-China trade war’s impact on global growth, Fortescue chief executive Elizabeth Gaines on Monday expressed confidence in the prospects for Chinese steelmaker demand.

“We see the continued demand for iron ore underpinned by the strength of steel production in China,” Ms Gaines said.

“We are seeing a strong start to this financial year.”

Iron ore prices surged nearly 60 per cent in recent months, with the benchmark price hitting about $US120 a tonne in June and delivering a windfall for miners. But prices have since dipped back below $US100 as supply begins to normalise and trade tensions weigh on China’s economic growth.

The trade dispute escalated last week after both sides launched a new round of tariffs on each other’s exports. Ms Gaines said protracted trade protectionism was “not good for global growth”, acknowledging there was “some volatility”, but said Fortescue was well-placed to deliver strong margins despite fluctuations.

“The iron ore price is currently around $US88-$US89 a tonne … still a higher level than it was a year ago,” Ms Gaines said.

“What we are really focused on is control of the things we can control – being a low-cost producer, being strategic in our product mix and enhancing our overall product mix.

“We can deliver very strong margins – and that’s through all market cycles.”

Fortescue, the world’s fourth-largest iron ore miner, on Monday revealed an all-time-high profit of $US3.2 billion ($4.7 billion), prompting the company to double its final dividend to 24¢ a share.

The announcement brings total dividends for the financial year to $1.14 a share, a 396 per cent increase on the previous year. It comes as the federal Treasurer, Josh Frydenberg, issued a fresh challenge to corporate Australia to end the proliferation of special dividends and share buybacks and instead focus on investments in growing business.

Andrew Forrest – Fortescue’s founder, chairman and major shareholder – is set to pocket $1.24 billion from the full-year dividends. Dividends from his holding in Fortescue help fund his philanthropic organisation, Minderoo Foundation.

The company’s profit result and dividend exceeded analyst expectations.

“The final dividend was stronger than we had expected,” said RBC Capital Markets analyst Paul Hissey, who noted the company was paying 78 per cent of its profit to shareholders.

“This was a strong set of results for Fortescue Metals Group.”

Mr Hissey said the decline in the iron ore price was expected to contribute to a drop Fortescue’s earnings in 2020 financial year to $US2.9 billion.

JP Morgan analyst Lyndon Fagan said the iron ore price had rebounded 5 per cent on Friday, which was “likely to act as a tailwind for the stock”.

Shares in Fortescue fell 5.15 per cent on Monday to end the day trading at $7.18.
Source: Sydney Morning Herald

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