Australia's Fortescue readies first shipment of new mid-grade iron ore

PORT HEDLAND – Australia's Fortescue Metals Group is set to ship the first cargo of its new mid-grade iron ore next month just as a rout in Chinese steel prices helps it improve its margins in competition with higher grade products.

The world's fourth-largest iron ore miner will make the first shipment of its 60.1 percent West Pilbara Fines product to customers in China, in a step that is set to bolster its margins, Chief Executive Elizabeth Gaines said.

"If you think about West Pilbara fines…in context of margin… That could actually add an extra, in this current market, $10 a tonne," Gaines told a media briefing in Port Hedland on Wednesday.

Fortescue sold its ore in the September quarter for an average of $45 per dry metric tonne. We expect rising costs and lower realized prices for Fortescue's 58% ores to continue to put downward pressure on the company's earnings

"It won't increase our cost base, but even if it did cost by an extra 10 or 20 cents, you'd do that any day of the week."

The new product is a major step in the miner's strategy to wring more value from its iron ore after profits halved last financial year, while shipments dropped 8.6 percent in the September quarter amid plant maintenance and a pollution crackdown in China.

Fortescue's lower grade ore has fallen out of favour in recent years as Chinese mills enjoying high steel prices and eager to cut emissions have preferred higher grade product from rivals such as Brazil's Vale and Rio Tinto.

Fortescue gave the go-ahead for its higher-grade Eliwana mine in May, and is blending output from existing mines with lower-grade ore to produce its new mid-grade product.

Cost focus

The development comes at an opportune time for Fortescue, as Chinese steel prices slide on weak demand, with margins turning negative for some products this month, and spurring some mills to turn to lower grade ore.

"We suggested that if and when profitability starts to decline we would expect steel mills to have more of a cost focus and that our products would likely come more into favour," said Chief Operating Officer Greg Lilleyman.

"We are starting to see that in the last month in particular and even over the past week."

Fortescue expects falling margins at mills will fuel demand for its cheaper mid-grade ore, as well as for its 58 percent iron ore which is priced well below premium product.

Citi said this week that the price gaps between different iron ore grades are set to converge, which would benefit Fortescue.

But Australia's major miners BHP Group , Rio and Fortescue are also facing increasing costs after launching major expansion projects this year, with prices for everything from labour to equipment starting to rise.

"We expect rising costs and lower realized prices for Fortescue's 58 percent Fe ores to continue to put downward pressure on the company's earnings," Jefferies Group said in a Nov. 1 note, maintaining an "underperform" rating.

(By Melanie Burton; Editing by Manolo Serapio Jr.)