July 14, 2009 FORTESCUE Metals has fed expectations that it stands to benefit from the Chinese Government's dramatic claim that Rio Tinto's iron ore marketing team in Shanghai had been involved in espionage.
Chief executive and 31 per cent Fortescue shareholder Andrew Forrest said yesterday that the company — Australia's third biggest iron ore producer behind Rio and BHP Billiton — enjoyed a "deeply embedded relationship" with the Chinese economy.
"We will continue to position Fortescue to be able to grow with that economy and to take full advantage of how it manages its own system and to build Fortescue towards becoming a preferred iron ore supplier in to China," Mr Forrest said.
His comments came as the Australian Government pressed for the release from lock-up of four Rio employees, including the Australian head of iron ore operations in China, Stern Hu.
Mr Forrest was speaking at Fortescue's Cloudbreak mine in the Pilbara on the release of the group's June-quarter production report, one that revealed that it needs to spend another $220 million on remedial works at its processing facilities to get to its target of annual production of more than 45 million tonnes of iron ore.
Ahead of the remedial work, production for the June quarter was better than forecast, at a record 8.5 million tonnes. Mr Forrest said that in terms of operational efficiency and volumes, Fortescue was headed in the right direction.
"The strong June quarter really embeds these positive trends," he said. Fortescue shares closed 9¢, or 2.6 per cent, higher at $3.49, while Rio and BHP were down 3.5 per cent and 1.37 per cent respectively.
The July 5 detention of Mr Hu and his Chinese colleagues has widely been interpreted as part of a push by Beijing to assert control over iron ore purchases by the country's steel mills, the biggest of which are state-owned. The push comes in the face of the rising iron ore pricing power of Rio, BHP and Brazilian producer Vale. It also follows Rio's recent dumping of a refinancing deal that would have given China's state-owned Chinalco an 18 per cent Rio stake and board seats.
Chinalco's attempted integration with Rio is something that China already enjoys with Fortescue.
"Fortescue has always enjoyed a deeply integrated relationship with the Chinese economy and that continues unabated," Mr Forrest said. He said that Fortescue — 17 per cent owned by state-owned steel producer Valin — would nevertheless be watching Mr Hu's fate "very closely".
"We are all aware of the sensitivities in China," Mr Forrest said.
He said it was "enormously difficult" to draw lessons from the Rio situation. "I think companies when they deal with state-owned companies, as Fortescue does, need to bear in mind who the shareholder is. We have always done that," Mr Forrest said.
Mr Forrest said that Fortescue felt for both "sides."
"I think this must have been enormously difficult for China to have taken this action. It would not have been taken lightly," he said of the July 5 arrests.
Mr Forrest also had sympathy for Rio in a comment that indicated that Rio's Shanghai marketing team had been doing its job in maximising prices and volumes for Rio's iron ore sales to China.
"For Rio Tinto, we feel for them as well as they, for all intents and purposes, they would have been, in their view, running a tight ship," Mr Forrest said.
Speaking from China, Fortescue's commercial executive director, Russell Scrimshaw, said the drama at Rio's Shanghai offices had not had a direct effect on Fortescue.
"But of course, in these circumstances, you doubly keep a watch on everything that you do and observe. The good news is that our support there is continued and strong," he said.
Mr Scrimshaw said that Fortescue had not felt the need to go back and do an "audit of what we've been doing" in the wake of the Rio allegations.
Earlier, Mr Forrest said it was a "blunt no" when asked if the company had handed out red envelopes containing cash to Chinese journalists to attend media events. BusinessDay reported yesterday that Rio's public relations firm in China had done so.
FMG Price at posting:
$3.49 Sentiment: Buy Disclosure: Held
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