The signs were there in the final parts of the 2021-22 financial year as costs clearly rose at its Pilbara iron ore mines (around 3% a quarter) but they well and truly crystalised in the September quarter for Fortescue Metals.
And while costs rose and production hit a record in the first quarter, debt surged as well over the same period on a gross and net basis while cash on hand fell.
Fortescue said on Thursday that while its iron ore division had continued to perform strongly with solid export volumes it had seen a 16% surge in unit costs over the past year.
The March quarter of this year saw the company note a 3% rise in costs per tonne to $US15.78, which was almost the $US15.912 for the 4th quarter of 2020-21. In its 4th quarter and full year report the company revealed a $US1.28 or 8% rise in costs to $US17.19 a tonne.
On Thursday it said the September quarter saw a 17% jump to $US17.69 a tonne from 2021’s $US1525 a tonne.
Its average iron ore price was $US87 a tonne in the September quarter, down from $US118 a tonne a year ago, or a drop of more than 26%.
Its shipping performance, though, was top-class and saw a 4% rise to a record 47.5 million tonnes for the three months to September.
Production fell 10% to 54 million tonnes from 60 million (which added to the rise in costs because the company’s fixed production costs were spread across fewer tonnes).
If this is repeated in the current December quarter, the company is facing a severe drop in revenue and earnings.
On the face of it a 4% rise in exports can’t offset a 24% slide in the selling price plus a 16% rise in costs.
In fact, iron ore prices have continued to slide this month – they finished just over $US86 a tonne for the 62% Fe fines product that is the Pilbara blend benchmark globally – that’s around $US6 away from the year low touched 10 and a half months ago.
That will put further pressure on Fortescue’s margins this quarter and for the December half.
With no real sign of any upturn in demand for steel in China or output (and therefore demand for iron ore) Fortescue will be battling its bigger rivals in Vale of Brazil, BHP and Rio Tinto who export higher quality iron ore which mills can use to get more steel from at lower costs.
The lower price for the 58% – 61% Fe or so fines Fortescue does ship can be used by steel mills to lower costs, but usually the superior ores from the big three win out, especially Vale and its 65% Fe fines product (which Vale can’t supply enough of because of the huge distance to China from northern Brazil).
In commentary Fortescue said:
“In a strong start to FY23, mining, processing, rail and shipping combined to deliver record first quarter iron ore shipments of 47.5mt, four per cent higher than the prior comparable period. This reflects strong operating performance across the supply chain and availability of inventory.
“The C1 cost of US$17.69/wmt was three per cent higher than the previous quarter, and 16 per cent higher than Q1 FY22, largely reflecting the price escalation of key input costs, including diesel and labour rates, partly offset by a lower AUD:USD exchange rate.”
The lower value for the Aussie dollar also benefits BHP and Rio Tinto which sell in greenbacks and incur costs in the Pilbara in much lower value Aussie dollars.
Fortescue said its cash balance was $US3.3 billion September 30, lower than the $US5.2 billion at June 30 and $US4.1 billion a year ago.
Gross debt was unchanged at $US6.1 billion the end of the quarter, and net debt was $US2.8 billion ($US900 million at June 30).
Gross debt was 50% higher than the $US4.2 billion reported a year ago which left net debt around $US100 million. That means net debt has jumped by $US2.7 billion in the year.
And there’s no looking to China and the old/new regime for any help.
Trade and production data this week had no silver linings at all for iron ore exporters or coking coal shippers.
China’s appetite for foreign iron ore and the consequent crude steel output showed a sector drifting as it faces depressed demand from building and construction because of the property crisis.
Analysts say whatever benefit there is from increased spending on infrastructure is merely filling the gap in demand from home building and not really adding any significant stimulus.
China’s imports of iron ore in September rose 3.6% from the previous month to 99.71 million tonnes, up from August’s 96.21 million tonnes. It was also up from the 95.61 million tonnes imported in September 2021.
That took imports for the January to September period 822.5 million tonnes of iron ore, down 2.3% from the same period a year ago.
And while China’s steel product exports last month were 4.98 million tonnes, up from 4.92 million tonnes in September 2021, they were down 3.4% in the first 9 months of the year to 51.21 million tonnes, so no growth there.
On the face of it the 17.6% rise in crude steel output in September from a year to 86.95 million tonnes looked very bullish. But that was merely a reflection of the sharp fall in the same month of 2021 thanks to power shortages, rationing and Covid lockdowns in several major steel producing regions such as Tangshan.
September’s crude output rose a small 3% from August and remains on track for a lower total for 2022 compared to 2021.
Exports in the first eight months of the year were down 3.4% from the same period a year ago to 51.21 million tonnes.
The country produced 780.83 million tonnes of crude steel from January to September, down 3.4% from the same period last year.
