Shares in Fortescue Metals Group eased yesterday as the company’s December half year financial report confirmed the realities of the data in January’s production report for the same period – the company’s revenue and earnings took a hit from lower prices, higher costs and the weaker demand for the company’s lower grade iron ore.
The shares ended down 2% at $21.15 after being a little lower earlier in the session.
Fortescue might have reported record production and exports for the six months to December on January 25, but the reality is that was nowhere enough to offset the slide in iron ore prices and the widening f discounts that Fortescue has to take when market conditions are weak
That saw a 13% slide in revenue to $US8.12 billion which in turn resulted from a nearly 16% drop in the average price of iron ore and the widening of the discount from the benchmark 62% Fe fines price to 70% from 90% a year earlier.
That means Fortescue only received 70% of the average Platts price of $US96 a dry tonne against a 90% realisation of the (15.7%) higher $US114 a tonne price a year earlier.
The slump in prices and the widening in the price discounts it was forced to wear in the half saw the miner, 36% owned by chairman Twiggy Forrest report a 32% slide in net after tax profit to $US2.8 billion.
Because Fortescue mostly ships ore with an iron content of between 58% and 61%, it has to take a lower price than the benchmark 62% Fe price produced by the likes of Rio Tinto.
Underlying earnings before interest, tax and depreciation fell 28% to $US4.762 billion for December half.
Fortescue will pay an 86 Australian cent interim dividend which is down from $1.47 a share a year earlier and the $2.11 a share final for 2020-21. It was also under the 2019-20 final of $1 a share.
The lower dividend, though, will see Twiggy Forrest’s share of the dividend payout for the half a still considerable $973 million.
While the lower prices and higher costs (Fortescue said costs were up 20% in the half, another fact that was highlighted in the January 25 report) confirmed the weakness of the December half year, another major factor at work was the steep slide in iron ore prices this week (down 10% or more according to some online data sites) after the Chinese government continued to probe the recent sharp rise in prices and hectored local reporting agencies and others in the data sector.
It is a repeat of what the government did in the domestic thermal coal market in October and November when prices soared as China nearly ran short of coal. The intervention and ‘jawboning saw domestic thermal coal prices slide from around or just over $US300 a tonne to half that level.
That had a knock-on impact in coal markets outside China but hasn’t lasted as prices have risen from around $US161 a tonne for typical Newcastle type thermal coal to nearly $US260 a tonne two weeks ago and $US239 a tonne on Wednesday.
Now investors are wondering if Fortescue and other producers might get caught up in the latest Chinese government attacks.
