The market sort of liked Fortescue’s surprise sweetheart price deal with Chinese steel mills that undercut BHP Billiton and Rio Tinto, plus the Huge Vale group of Brazil.
After all, Fortescue gets a guaranteed sale of 20 million tonnes at a guaranteed price, which puts pressure on its rivals, and also makes the Chinese Iron and Steel Association look good.
And the company gets guaranteed finance from China of up to $US6.5 billion to finance its expansion plan.
The shares ended up 2.9% or so on a day when the overall market was down. The shares closed up 13 cents at $4.58 after touching a day’s high of $4.75.
Fortescue has agreed to a price cut of 35% from the Chinese mills, while the Australian majors are holding out for a 33% cut (on average), based on their settlements with the Japanese, South Korean and Taiwanese mills.
Fortescue doesn’t ship iron ore into non-Chinese markets, but its settlement will give the Chinese the victory they need to try pressure BHP and Rio to settle at larger discounts to the Japanese, and give China a face-saving deal.
In fact the average price cut for lump ore for Fortescue is 50%, 3% more than the 47% cut obtained by the Japanese mills, which prefer to use lump ore.
But the big part of the announcement appears to be the favourable deal from China for new finance for Fortescue.
"A condition subsequent to this agreement is the completion of finance by 30 September 2009, by Chinese financiers on terms acceptable to Fortescue. This is estimated by Fortescue to be an amount of US$5.5 billion to US$6 billion.
"Under the Agreement, CISA has guaranteed that a priority will be given to FMG to negotiate iron ore prices for 2010 if the annual pricing negotiation is conducted," FMG said in yesterday’s statement.
The need for the finance wasn’t explained in any more detail. There were reports last week that the company was looking for another $US2 billion in finance for its expansion.
So it would seem that in return for giving the Chinese a facing saving victory (but not much, they wanted a cut of 45%), Fortescue will get a cheap refinancing of its debts and expansion plans, and the lead position in 2011’s price negotiations next year with CISA.
CISA in returns gets a well known Australian iron ore supplier to cave-in and give it a win which helps it save face and gives it some legitimacy in the price negotiations from now on.
CISA’s aggressive attitude to Australian suppliers and the way that Rio had by-passed it are said to have been a factor in the Chinese government’s move to detain and then arrest and charge Rio executive, Stern Hu and three Chinese co-workers amid claim of espionage and spying. All remain unproven.
Fortescue is partly-owned by Chinese steel mill Hunan Valin group and the comments by Mr Forrest in the company’s statement will raise some hackles around the local mining industry, and confirm to others the dangers of selling equity to Chinese end users.
Hunan Valin owns more than 17% of Fortescue’s issued capital, and is the second biggest shareholder behind Mr Forrest.
Fortescue Chief Executive Officer, Mr Andrew Forrest, said the agreement breaks the market impasse which has enveloped the Chinese iron ore industry in uncertainty and added risk for the past 12 months.
“This groundbreaking agreement cements the strength of the bilateral relationship between Australia and China in which mutual issues can be resolved and future opportunities identified.
"It also creates a realistic and agreed iron ore price that delivers value for all parties and provides strong support for Fortescue’s continued growth” Mr Forrest said.
“The ongoing market speculation has promoted unprecedented iron ore and steel price volatility, which in turn has created extreme production uncertainties for Chinese steel mills and for suppliers setting individual contracts with those mills."
The involvement of CISA is significant as it gives the embattled body a much needed win after it botched its demands to be the only authorised contract negotiator.
But it wasn’t a complete win for CISA; Baosteel, China’s biggest producer, was involved and named in today’s statement.
There have been reports in stories on Chinese government affiliated news websites that Baosteel might replace CISA to resolve the 2010 contract talks.
At a Beijing press conference CISA secretary general, Shan Shanghua said the Chinese mills will pay 94 US cents a dry metric tonne unit for fines, the most commonly traded product with Chinese mills (lump ore is preferred in Japan).
"The price agreement will apply for the second half of 2009", he said.
"China had sought a discount of as much as 45 percent this year, more than the 33 percent offered by Rio Tinto Group, arguing it should enjoy a bigger cut as the largest buyer. The price for lump iron ore will be 100 cents a dry metric ton unit or 50 percent lower," Shan said.
