Fortescue Full-Year Earnings Plunge 88% on Iron Ore Collapse

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Australia's iron ore expansions

Billionaire Andrew Forrest’s Fortescue Metals Group Ltd. reported full-year profit tumbled a more-than-expected 88 percent after iron ore prices plunged on a global glut and a slowdown in China’s steel industry.

Net income was $317 million in the year ended June 30, compared with $2.7 billion a year earlier, the world’s fourth-biggest exporter said Monday in a statement. That missed the $417 million average of 12 analysts’ estimates compiled by Bloomberg, sending the stock down to the lowest in almost seven years.

Increased production by Fortescue and bigger rivals, including Rio Tinto Group and BHP Billiton Ltd., coincided with a slowing in Chinese steel output, sending prices to six-year lows and eroding their profits.

“The result showed a significant impact from the fall in the iron ore price over the year,” David Lennox, an analyst at Fat Prophets in Sydney, said by phone.

Fortescue fell 15 percent to close at A$1.635, giving it a market value of A$5.1 billion ($3.7 billion). The close was lowest since Nov. 20, 2008.

The largest mining companies have been wrong-footed on slower growth in China, Glencore Plc Chief Executive Officer Ivan Glasenberg said last week, with demand “getting very tricky to call.” Fortescue derives almost all its revenue from China, according to data compiled by Bloomberg.

‘Market Vandalism’

Iron ore prices have whipsawed this year, tumbling to the lowest level in at least six years in early July before rallying back into a bull market. Prices may slump 30 percent over the next 18 months on supply increases, Goldman Sachs Group Inc. said an Aug. 14 note.

Fortescue, which raised shipments from 28 million tons in 2009 to 165 million tons in the year to June 30, said last month it plans to maintain cargoes at the current level amid weaker prices.

Raising output further amid weaker demand “is market vandalism and self-harm when industry leaders do it,” Forrest said in the statement. Customers’ demand has now been saturated, meaning output increases are only serving to lower prices, he said.

Steel production in China, the world’s largest producer, shrank 1.8 percent to 476 million tons in the first seven months of 2015 from the same period a year earlier, according to government data.

Global Glut

A global glut will reach 83.2 million tons by 2020, up from 58.1 million this year, according to Morgan Stanley. Forrest called earlier this year for the largest iron ore suppliers to cap output in an effort to stimulate prices, a strategy dismissed by Rio Tinto Group and Gina Rinehart, the billionaire developing a new mine in Western Australia.

Fortescue, which flagged in March it would consider selling minority stakes in mines, railroads and port, has been approached by Hebei Iron & Steel Group Co. and Tewoo Group Co. over acquiring a stake in the infrastructure assets, people with knowledge of the matter said this month. The producer also has held talks with Baosteel Group Corp. and Japanese firms about selling a stake in some of its mines, people familiar with the matter said in June.

Benchmark iron ore advanced 0.5 percent to $56.10 a metric ton on Friday, according to Metal Bulletin Ltd. data. The material has plunged 21 percent this year.

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