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Fortescue Metals Group expected to meet FY17 export guidance but discount persists

There is mounting speculation Australia’s third force in iron ore, Fortescue Metals Group, will hit the top end of its annual export guidance, and possibly exceed it, after a strong end to the year.

But the price FMG receives for its lower grade ore will remain below its long-term average.

Analysts closely watching iron ore shipping data have deducted Fortescue and BHP Billiton are likely to report production for the 2017 financial year towards the top of their guidance of up to 170 million tonnes and 272 million tonnes respectively but warned Rio Tinto, which works to the calendar year, will need to perform strongly over the next six months to hit its 330 to 340 million tonne target.

Fortescue needed to ship about 44 million tonnes in the three months to June 30 to reach the top end of its guidance.

It comes as the iron price continues to record significant shifts and divide analysts.

After climbing to more than $US90 a tonne in February, the 62 per cent iron ore index retreated to a year low of $US53 a tonne in June and before recovering to about $US63.

But Shaw and Partners analyst Peter O’Connor said he expected the price to return to about $US50 per tonne in the second half, weighed down by a persistent supply glut.

“Seasonally the second half is always stronger for Australian iron ore exports,” Mr O’Connor said.

“With Rio likely to have to push hard to meet guidance and with Roy Hill still ramping up it could be stronger than expected and weigh on the iron ore price.

“It should come back to the $US50 per tonne range in the second half even with demand remaining strong and steel makers [in China] shooting the lights out.”

Supply glut

It is a view shared by Citi, which last month cut its iron ore price forecast for the second half of the 2017 calendar year to $US49.50 from $US62 per tonne.

The Citi analysts said they expected new supply from Vale’s S11D project and the ongoing ramp-up of Gina Rinehart’s Roy Hill mine to push the price to the “low $US40s” some time between October 2017 and March 2018, “triggering sizeable supply cuts which are required to rebalance the market”.

But UBS commodities analyst Daniel Morgan, who expects the price to average $US65 this quarter, said while shifting sentiment was creating volatility in the price underlying Chinese demand remained strong.

“I think steel markets look good for the third quarter – demand looks good, production is stable and steel inventories are low so I don’t think there is need for any great concern about iron ore prices over the next quarter,” Mr Morgan said.

Credit Suisse analyst Matthew Hope also told clients he expected demand from steel mills to remain buoyant as they restocked ahead of expected restraints on steel output over winter, maintaining his $US70 per tonne iron ore price forecast for this quarter.

However, it is not all good news for Fortescue’s June quarter production report, expected later this month, with the discount buyers inflict on Fortescue and other lower grade iron ore producers remaining significant in the June quarter.

Fortescue has historically received between 85 and 90 per cent of the index price but lowered its full-year price guidance in April to between 75 and 80 per cent as the discount widened.

Mr O’Connor said while the discount for 58 per cent iron ore worsened during the June quarter, reaching as much as 37 per cent, it had since narrowed to about 16 per cent.

Mr Morgan agreed the discount would likely remain “wider than what the market has been used to for the last five or six years” but not as severe as April’s peak.
Source: Australian Financial Review

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