As winter stockpiling pushed iron ore imports into China to a record high in November, Fortescue Metals Group is demonstrating confidence that prices will hold up through next year by preparing plans to ship lower-grade ore from its new Kings mine in the Pilbara, forgoing short-term revenue in favour of maximising the cash generated by the mine.
Imports into China hit 77.8 million tonnes last month, up from 67.8mt in October and 65.8mt a year earlier, according to a Bloomberg report yesterday.
Like rivals BHP Billiton and Rio Tinto, Fortescue is downplaying the likelihood of big new greenfield mines from its Pilbara landholdings, but it too is clearly confident enough in demand to keep pushing production capacity as it pays down its debts.
But with iron ore prices hovering at the $US140/t mark on the re-stocking, such is Fortescue's confidence in medium-term demand in China it is considering giving up some short term revenue from its Kings mine, due to reach full production by the end of March, by initially exporting low grade ore to wring every possible dollar from the 40 million tonne-a-year mine.
Speaking last week at Fortescue's Solomon project, which contains the Kings Mine, chief executive Nev Power said the first six months of production at Kings could come from detrital ore sitting above the main deposit at the mine.
While the product has an iron content of about 59 per cent, high levels of impurities such as aluminium would normally see the ore consigned to the waste pile.
Mr Power said Fortescue was currently seeking customers for 10mt to 20mt, and though the impurity levels meant it would be sold at a discount to other Fortescue blends, turning the waste to a profitable sideline would maximise the mines' profit in the long run. He said Fortescue believed Chinese steelmakers now using low-impurity ore would snap up the new product if it came at a discount to market rates.
Mr Power would not speculate on the likely price the detrital product would bring, but said Fortescue could still make a healthy profit from its sale.
The strategy is similar to that adopted by Atlas Iron, which has been successfully marketing a low iron content ore from its Pilbara operations, turning its waste piles into additional cash by selling it to steel mills hungry for a bargain. In the September quarter, Atlas was receiving an average $88 a dry metric tonne for its 53.4 per cent iron "value fines" product, before shipping costs, compared to $105/t for its 57.2 per cent iron standard blend.
Demand for the cheap ore has remained strong, according to Atlas. With plans to ship 800,000 to a million tonnes of the product this financial year, Atlas said last week it had signed new contracts for the supply of 400,000t of value fines, saying it had become "well established in the market".
The reporter recently travelled to Solomon as a guest of Fortescue Metals Group.