Fortescue expects strong Chinese iron ore demand despite Australian tensions

Although China-Australia relations have become agitated since 2020, Australian iron ore major Fortescue Metals Group Ltd. expects demand from China, where 95% of its revenue comes from, to remain strong after it reported robust iron ore shipments of 42.3 million tonnes for the third quarter of fiscal 2021.

Despite heavy rainfall in Pilbara, Western Australia, Fortescue's iron ore shipments for the quarter were in line with a record for the third quarter, achieved in 2020. The company's iron ore shipments for the first nine months of its fiscal 2021 also hit a record of 132.9 Mt.

From a demand perspective, production in China remains at record levels with output reaching 271 Mt for March quarter, representing an increase of 15.6% from a year ago, which suffered from shutdowns due to the coronavirus.

Fortescue Metals Group CEO Elizabeth Gaines. Source: Fortescue Metals Group

Fortescue CEO Elizabeth Gaines said on an April 29 call with analysts that she expects the Chinese government's policies to remain supportive for steel demand through 2021 with a focus on promoting domestic consumption and sustaining investment.

"The strong demand coupled with environmental-related production controls in Tangshan contributed to a sharp increase in steel mill margins," Gaines said, though she expects these factors will be offset with production increasing elsewhere, given China's latent steelmaking capacity and a strong demand environment.

In March, steel mills in China's major producing hub Tangshan were largely ordered by the local government to cut production in a bid to counter air pollution in the city.

"Our view on steel margins is currently at elevated levels. That's one part of the function of some of the environmental restrictions. I guess we'll wait and see whether there are other restrictions introduced,” Gaines said, adding that the company will continue focusing on improving product quality and lowering costs instead of counting on high steel margins.

"This is a cyclical market … We've stayed very focused on staying close to our customers, delivering our quality products and keeping our costs low. So we generate strong margins, regardless of that cycle," Gaines said.

In the meantime, rising economic indicators outside of China continue to improve support for the recovery in steel markets, the CEO noted, adding that the company will continue to seek opportunities to optimize value through its integrated operations and marketing strategy as it adapts to changing market dynamics.

Amid worsening political tensions between China and Australia, Gaines said Fortescue has been promoting the importance of the trade relationship with China at every opportunity while maintaining strong relationships with China. "We stay close to customers and we really engage in a very multifaceted way to make sure that we have strong relationships with China, regardless of what the [Australian] federal government might be doing," the CEO added.

"Australia has always been a nation that relies on trade, and any opportunity we have to remind the Prime Minister or his ministers of that importance of trade," said Gaines, adding that the mining industry has been a significant contributor to the national economy during the pandemic.

She also highlighted the importance of Australia's iron ore supply to China, the world's largest steelmaking country, saying the country is a significant contributor to the Chinese steel industry and has demonstrated the security and reliability of its supply during the pandemic while other countries like South Africa were affected.

"It's not just a one-way relationship for us… The reality is that 60% of the iron ore that is imported into China comes from the Pilbara [region]," Gaines said, adding that there is no alternate supply source to meet China's iron ore demand.