Fortescue unhappy with iron ore price

30 Aug 2012, 5:23 pm   -   Source: AAP

Fortescue Metals boss Nev Power insists the plummeting iron ore price will rebound but admits he is disappointed by its rapid decline

Fortescue Metals insists the plummeting iron ore price will rebound but admits it is disappointed by the rapid decline.

Iron ore spot prices have dropped by 50 per cent from the record levels of about $US180 ($A174.70) a tonne in the first half of calendar 2011, and have fallen by 30 per cent over the past two months.

Spot iron ore prices fell $US4.50 to near three-year lows of $US90.30 ($A87.64) on Wednesday, with reports of more falls on Thursday in China.

Iron ore is Australia's biggest export earner.

Major miners BHP Billiton and Rio Tinto, along with Fortescue, are dependent on continued Chinese demand to earn returns on the billions of dollars they have committed to expanding iron ore production in the Pilbara region of Western Australia .

Fortescue chief executive Nev Power said the company still expected strong Chinese economic growth of seven or eight per cent a year, notwithstanding short-term hiccups.

Mr Power said he blamed the recent falls on Fortescue's customers - Chinese steel mills - which were running down inventories instead of producing more steel.

He told a business lunch in Sydney that the was confident the underlying demand was still there and expects the price to rebound to $US120 a tonne within two months but admitted it was hard to pick.

"It's disappointing for us to see the iron ore price dropping as quickly as it has," he said.

"Steel production has been at record levels at two million tonnes plus per day in China, but there has been a softening in the steel market predominantly because of the credit squeeze that's been imposed by the government (to control property prices).

Mr Power predicted the mills would reduce production and start running down steel and iron ore inventories.

"Very quickly though, iron ore will run out in the stockpiles at the ports and the stockpiles at the mills," he said.

"We'll then see those mills come back into the market, probably led by the traders to turn around the price."

Fortescue is still producing at costs of under $US50 ($A48.53) a tonne as are other major miners, meaning the commodity is still profitable.

Research elsewhere has found that, as well as stimulating an oversupply of steel to control iron ore prices, China has also invested heavily in subsidising new iron ore projects - at home and globally - to bring on more supply.

However a weak iron ore price has implications for the federal government too, with Treasurer Wayne Swan banking on collecting $13.4 billion in the mining tax over four years.

Morningstar analyst Mathew Hodge said the research group was less positive on commodities involved in steel such as iron ore and coking coal because they saw that market as approaching maturity in China.

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