And Fortescue Metals yesterday issued another announcement concerning contracts and shipping arrangements: this time it is reviewing the legal status of shipping contracts that have been suspended or delayed.
Fortescue told the ASX it had sought legal advice on the 10 contracts involved.
"Fortescue sought legal advice prior to taking its decisive action under the contracts and will continue to do so in the prudent management of this issue.
“Each of the ten (10) contracts that have been actioned, need to be considered on their specific facts and merits as Fortescue will use all the appropriate legal mechanisms for determining the disputes that have arisen between some of the parties and any future disputes that may arise. Fortescue will continue to update the market if there are any material developments."
Suing buyers will be a waste of time: it will cruel relations, won’t get the money for the shipments in a hurry and will probably see the buyers look elsewhere.
“Legal threats over contract non-performance instead of negotiation is seen as a weakness in commodity deals.
Fortescue recent revealed that a large proportion of its iron ore contract shipments had moved from being shipped on a CIF basis (that is, Fortescue pays the shipping costs and insurance and orders the ships etc and controls the shipment timing, to an FOB basis, where the buyer does all that and sends ships at its timing).
The company told the ASX 10 days ago in a statement that: "The changed arrangements as a result of these suspensions, should not affect Fortescue’s marketing program in regards to volumes of product shipped, just the split between CFR and FOB sales terms
"To date approximately 2/3rd of Fortescue’s sales have been on CFR terms but this is likely to reduce to around 1/3rd of sales. CFR sales are where Fortescue supplies the product on a landed basis into China whereas FOB sales are where the customer arranges it own freight from Port Hedland to China.
"The changed arrangements are in direct response to market conditions demanding greater FOB sales."
In other words, the buyers of the ore, faced with falling demand for steel and plunging costs of shipping, have said to Fortescue, ‘change the shipping terms or we won’t take any of your iron ore, no matter how much you send’.
Fortescue had no option but to comply: it means its buyers will now have more control over their purchases and Fortescue will be hostage to their needs, not the other way round when prices were strong and two thirds of Fortescue’s shipments were controlled by it.
This deal and the news that 10 contracts are being legally checked means Fortescue is being given a tough time of it by Chinese buyers who are not hesitating to use the market downturn and Fortescue’s weak financial position to force down iron ore and other costs, to their advantage.
That, more than anything should tell us that the resource boom is dead and being buried daily.
Fortescue shares lost more than 10%, or 27c to $2.36 on the announcement.The market can see through corporate spin when confronted by it.
The real story is what does the loss of these 10 contracts do to Fortescue’s sales revenue figures?
Fortescue made a loss of $2.5 billion last year and is forecast to notch up EBITDA of $700 million this year, rising to $1.4 billion next year.
Yet broker downgrades are coming. Morgan Stanley forecast a first-half loss of $542 million, expressed concern over the debt, project cancellation penalties and litigation over a Singaporean shipping contract.
