Fortescue Metals Group has slashed final dividend by half as its revenues and profits were hit by the move of Chinese steel mill buyers to source higher quality iron ore and impose price cuts on the ore than Fortescue mines and exports.
Final dividend was cut to 12 cents a share from 25 cents, making a total for the year of 23 cents down from 45 cents a share.
The company, the world’s fourth-largest iron ore miner reported a full-year net profit of $US878 million, down from $US2.09 billion a year ago, and missing market estimates of $US1.08 billion.
Fortescue blamed the revenue drop to lower prices for its lower grade iron (than the 62% average produced by its Pilbara rivals) ores, confirming the average price it received per tonne in fiscal 2018 was $US44 per dry metric tonne, down from $US53 per wet metric tonne in fiscal 2017.
The market took the news in its stride and the shares rose by just over 1% to $4.26.
Revenues fell 18% to $US6.9 billion and the company said in yesterday’s statement. “The reduction in average price received is primarily attributable to high steel mill profitability in China which incentivises use of higher iron content ores to maximise production.”
Over the past several years China has moved to slash excess steel making capacity in a bid to limit environmental damage (from the sintering of low grade ores and low grade coals) and improve capacity utilisation. This has worked with an estimated 235 million or more tonnes of capacity closed in the past three years.
That has not had any impact on output or prices – steel rebar (reinforcing bar) prices are now around five to six year highs and crude steel output hit an all time high in July.
In fact Crude steel output rose by 7.2% year on year – to a new monthly record of 81.2 million tonnes, up 1.3% from June’s record. July’s record was in fact the 4th month in a row that China’s crude steel output has been at or near record levels.
For the seven months January-June crude steel output is up 6.3% from the same period of 2017 at 532.85 million tonnes.
Iron ore imports though in the seven months to July dipped slightly 0.7% from a year ago to 620.65 million tonnes.
Fortescue CEO Elizabeth Gaines said in the statement that the company’s operating costs – per tonne of iron ore mined and moved to port – were down 4% for the year and at a record low of $US12.36 per wet metric tonne, thanks to “ongoing productivity and efficiency improvements”.
The company shipped 170 million tonnes in the year to June and reaffirmed its 2019 outlook for shipments of 165 million-173 million tonnes, and costs of $US12-$US13 a tonne.
The low quality issue is why Fortescue is spending around $US2 billion on a new iron ore mine in the Pilbara to be called Eliwana which will boost its average ore content closer to 60% from around 59% at the moment.
CEO Gaines said in yesterday’s statement; "The development of Eliwana was approved by the Board, underpinning the delivery of a 60% iron content product which provides flexibility to capitalise on market dynamics while maintaining our low cost position. This new product will be called West Pilbara Fines and will be launched in the second half of FY19 from existing operations. “