Iron Ore Billionaire's Comeback King Looks Past China With Pactby , , and
Fortescue's accord with Vale may help meet future Asian demand
Tie-up is producer's latest surprise after defying skeptics
After inking a surprise joint venture deal with the world’s top iron ore producer, Fortescue Metals Group Ltd. is setting its long-term sights beyond China, its biggest customer and the world’s top customer.
The tie-up of Australian billionaire Andrew Forrest’s company with Vale SA amounts to the emergence of a new iron ore power bloc, according to Macquarie Group Ltd. The accord, which allows for the Brazilian company to buy a minority stake in Fortescue and invest in existing or future mines, may help the world’s fourth-biggest producer eventually push into new markets to the west of China, according to Chief Executive Officer Nev Power.
Fortescue’s latest deal is another unexpected twist in the company’s roller coaster history since 2003 that’s been marked by disputes with regulators, governments and rivals, multiple debt and investor dramas and share price gyrations. The Vale pact was sealed this month after about a year of talks initiated by Forrest against a backdrop of slowing demand in China, the biggest buyer of iron ore.
“In the most difficult circumstances, he’s always ready to pull another rabbit out of the hat,” said Philip Kirchlechner, previously Fortescue’s head of marketing from June 2003 to May 2006. The pact is “quite a sophisticated idea because it is doing something more strategic and visionary,” said Kirchlechner, now Perth-based director at Iron Ore Research Pty.
The accord partners, whose first priority is an ore blending joint venture in China, also have an eye on developing a pipeline of projects that could eventually feed steel demand driven by the demographic change likely to sweep through Central Asia to the Middle East, Fortescue’s Power said March 15 in an interview.
“We will be monitoring the market to look at what the demand curve looks like,” Power said. “While we are very focused on China and the developed regions of Asia at the moment, to the west of China we have all of central Asia, India and the ’stan countries, the Middle East and even Northern Africa, which is within a very efficient and competitive sea distance from Western Australia.”
Fortescue shares advanced 0.4 percent to A$2.75 at the close in Sydney Tuesday. They’ve climbed 47 percent so far this year.
Forrest founded Fortescue to tap China’s rapid industrialization even as larger rivals missed early indicators of a boom that saw crude steel output soar 12-fold between 1990 and 2014 as millions of people moved to cities and drove demand for homes, roads, cars and appliances.
From 2009 to 2015, Fortescue expanded full-year shipments six-fold, a faster rate than any other major supplier in a frantic dash to meet China’s hunger for imports. The producer’s stock surged by more than 40,000 percent between the renaming of a predecessor company in 2003 through to a mid-2008 peak, the period when it sent a maiden shipment of 180,000 metric tons aboard the Heng Shan to China’s Baosteel Group Corp.
“Their self belief is very strong and they have a really good operating team,” said Morgan Ball, managing director of iron ore producer BC Iron Ltd. Fortescue and BC Iron in December suspended a joint venture with a capacity of six million tons a year because of lower prices. “They are pretty innovative, they think about things differently,” Ball said in an interview in Perth.
Rio Tinto Group and BHP Billiton Ltd., the second and third-biggest iron ore exporters, are continuing to boost volumes amid a supply glut -- a strategy that’s been criticized by Forrest. The Vale pact will focus on raising realized prices by melding Brazilian and Australian ores and on winning market share at larger Chinese mills.
Investors have been tested. Roiled by the global financial crisis, Fortescue plunged 74 percent through 2008, then faced pressure in 2012 as prices tumbled and it risked breaching its debt covenants. The producer cut jobs, halted the development of mine and port projects and raced to secure $4.5 billion of loans in September that year to push out maturities and avert any catastrophe.
When prices collapsed again through 2014, Fortescue slashed full-year spending plans by half, paused development of a processing plant and focused on lowering costs of production and trimming its debt pile. Even after pulling a $2.5 billion bond deal in March last year, the company sold $2.3 billion of secured bonds a month later and cut its net debt to $6.1 billion by Dec. 31, compared to $8.6 billion two years earlier.
“There’s been a great deal of skepticism for a number of reasons, but the way Fortescue has extracted itself out of various issues in the past has been extremely well managed,” said Michael Bush, a Melbourne-based credit strategist at National Australia Bank Ltd. The company has outperformed expectations on lowering its production costs, and “has done an excellent job on many measures,” he said.
There remains doubt about iron ore’s prospects as China’s growth cools. The seaborne iron ore market may be in permanent decline from 2017 with China’s imports likely to peak this year, CLSA Ltd. said in September. A demand boost from India won’t match China’s scale and may be about 10 to 15 years away, while Africa’s development won’t need new supply for several decades, HSBC Holdings Plc said last year.
Fortescue will closely monitor development in the west of Asia and beyond, where about three billion people in emerging economies will need more steel in the long term, Power said. “Our objective is to make sure that we have the pipeline of projects to make sure that we can sustain our current product offer and volumes and also the opportunity to grow, when the market provides that opportunity,” he said.