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Iron ore supplier's solid bond with China

(China Daily)
Updated: 2008-05-14 10:21

The world iron ore industry is dominated by three major international suppliers: Brazil's Companhia Vale do Rio Doce and two Australian producers BHP Billiton and Rio Tinto. These three contribute around 80 percent of the world's sea-borne iron ore that are shipped into emerging markets such as China.

Just four years ago, Fortescue Metals Group Ltd (FMG) was a mere idea of Andrew Forrest, who grew up in the same area in Australia where BHP Billiton and Rio Tinton have their flagship ore mines. He sensed an emerging opportunity in countries like China, India, Malaysia and Vietnam, among others in Asia.

The company raised over $3 billion to build a railway track and a port to support the shipment of 4-billion-plus tons of iron resources from Australia. It has signed long-term contracts with 35 major Chinese steel mills to supply up to 100 million tons of iron ore each year. Its first shipment to China is due this month on a giant 170,000 ton ship.

FMG's Executive Director Russell Scrimshaw talks to China Daily's Zhang Ran about business opportunities in China.

Q: How does the emergence of FMG as a major iron ore supplier help, especially in price negotiations? Would it bring down the prices?

A: The addition of a large-scale supplier like FMG bodes well for buyers. Ore price circumstances are different every year and hard to predict. More sources of supply are always better for consumers.

Q: Baosteel has agreed to a price increase by Brazilian iron ore suppliers from 65 to 71 percent. But BHP Billiton and Rio Tinto are still holding talks with Chinese buyers. Since FMG will start shipping iron ore to China this month, is there any possibility that FMG will accept Baosteel's price for a 65 percent increase?

A: FMG has not yet shipped any iron ore, so we are not a part of the annual price negotiations. Hence this year we will let the parties complete their discussions and in the future, consider our position.

Q: If the pricing is not concluded in May, will you delay the shipment?

A: The industry convention is to use the previous year's price until a new agreement. We have not got to the point to consider that.

Q: How have FMG and Chinese steel mills been cooperating in the past?

A: We have worked closely with each of the major mills in China to meet China's iron ore requirements. We have formed a joint venture with China's largest steelmaker Baosteel to magnetize iron ore in an area near our railway line in Australia.

Second, of all the major suppliers of iron ore, we are the only one that has shown the confidence in Chinese manufacturers by sourcing heavy equipment for our mine, rail and port construction from them. We would like to tell everybody that the equipment we have sourced from China are of outstanding quality and we are very proud of this relationship.

Q: How do you view the merger and acquisition trend in the global mining business?

A: As it happens in all industries, there are times of consolidation and diversification. We are at a point when consolidation is going on not merely among steel mills, but also among resource suppliers. I think there will be more consolidation among suppliers in the future.

Q: What's your strategy in fighting monopoly?

A: The first and foremost strategy for us is to remain independent. It means the majority of shares of our company are committed to the long-term independence of FMG. We are fortunate that our principal shareholder Andrew Forrest, who owns 36 percent, and other shareholders who are close to our strategy give us enough ownership to control more than 50 percent of the equity. So the most important thing for us is to remain independent and not become a part of the consolidation trend.

Q: How much of FMG's iron ore will be exported to China?

A: More than 90 percent. In our first year, it will actually be more than 95 percent. We expect China to continue to be our major strategic iron ore partner in the very long term.

Q: Chinese steelmakers are also witnessing mergers and acquisitions. Will that affect FMG's business with them?

A: As for mergers in the Chinese steel industry, we reckon the top 10 will continue to consolidate their businesses and become global best-practice suppliers in the steel market. So they will be a significant part of our focus area in the future. There is also an emerging group of privately owned companies in China that are typically very innovative and aggressive. We well also be watching them closely.

Q: FMG has called for cooperation on railway lines between different companies. How's that going and what's its impact on the Chinese market?

A: Infrastructure is one of the reasons why Australia has lost iron ore market share in China. Australia has not been able to grow its production quickly enough to meet China's demand. The primary reason is because it does not have the infrastructure to transport the ore to Asian markets.

FMG has always felt that this roadblock should be cleared and other people should be allowed to use its infrastructure. Unless you have access to rail or port, it is very difficult to transfer your iron ore to other markets. So we will continue to take help of the courts of Australia to gain access to the infrastructure of major suppliers.

We are about to go to the highest court in the land for BHP Billiton's final appeal to prevent FMG gaining access to its railway line under commercial terms.