Fortescue Metals' Nev Power has 'great confidence' in China's long-term iron ore demand
March 30, 2015 - 12:00AM
Philip Wen
New infrastructure projects in Asia will need a lot of steel.
Photo: Reuters
Bo'ao, China – With arguably no other major miner's fortunes so inextricably linked to the health of the Chinese economy, it is little surprise when Fortescue Metals Groups chief executive Nev Power says he has "great confidence" in the long-term demand for iron ore in China.
But amid a glut of supply, the benchmark iron ore price fell to a fresh record low of $US53.14 a tonne on Friday night, and as Chinese leaders continue to reiterate that it will move its dangerously unbalanced economy away from the breakneck construction that has typified its decades-long boom into a "new normal" of moderate-to-high growth.
The pressure of the plummeting iron price has been seen as a reason for Fortescue chairman Andrew Forrest suggesting last week the big miners should consider a cap on iron ore production – a 'thought bubble' rejected by Gina Rinehart, derided as "hare-brained" by Rio Tinto, and which attracted the ire of the competition watchdog.
Fortescue is now banking on China's new investment initiatives in the region to help bolster steel demand. The Silk Road Fund and Asian Infrastructure Investment Bank, which has ambitions to fund infrastructure projects in the region, particularly in Central and South Asia, has gathered swift momentum after a strong push from the Chinese leadership. Australia formally announced on Sunday morning it would sign a memorandum of understanding to join the AIIB.
"We see this as a very important initiative that will help fund the major infrastructure all throughout Asia to ensure that everyone in Asia has the opportunity to have a higher standard of living," Mr Power told reporters on Saturday on the sidelines of the Bo'ao Forum, on Hainan Island in China's south.
The regional infrastructure ambitions are also a strategic play by China to help soak up over-capacity in its steel industry and to take advantage of its construction know-how and still relatively cheap labour force.
Mr Power said China's fundamental economic growth also remained strong and demand for steel would remain robust even as China continues its shift toward a more consumer-driven economy, pointing out an expected boom in China's automobile industry as an example of consumer-driven steel consumption.
"The stats are that there is 1 car per 10 people in China right now, compared to 1 car per every 1.2 in the US," Mr Power said. "The target for China is to go to 1 car per 5 people [by 2020], that in itself is a massive amount of steel but it also means new highways, new carparks and new infrastructure to support that level of automobiles."
But the falling iron ore price is as much a factor of supply, induced by the rapid increase in production from majors BHP Billiton, Rio Tinto and Fortescue.
Mr Power backed up his chairman's comments, saying he would be "very surprised if the ACCC decided to pursue" Mr Forrest's call for a iron ore production cap.
Mr Power said there needed to be a "rational development of our industry" and that if there is "over-production in iron ore it will inevitably drive capital out of the industry".
"And that will mean the under-investment will see exactly what we saw in the past where it exacerbates the volatility in price," he said.
"And what [Forrest's] talking about is there needs to be more rational behaviour to ensure that the investment is there and meeting the supply demand needs rather than any concept of trying to flood the market."
The Fortescue chief executive said in Hong Kong last week that a strategic investor could "free up" the company and prevent it getting "bogged down" with debt repayments. He indicated a decision to sell a stake in one of its Pilbara mines could be taken if the iron ore price stayed depressed for an extended period.
Mr Power did not comment on any discussions or on Chinese media speculation that 15 per cent owner Hunan Valin could seize on Fortescue's low share price to increase its stake.
"We talk to a very wide range of companies when we're up here in China … we have an ongoing dialogue with major Chinese customers and major Chinese industrial players," he said.
