Fortescue Metals Group has poured doubt on Brazil's ability to boost supply of iron ore, suggesting Chinese stockpiles will continue sliding and the extraordinary rallyin prices for Australia's most important export commodity has further to run.
In Australian dollar denominated terms, the price has not been this high since May 12, 2010.
Fortescue chief executive Elizabeth Gaines has overseen record export volumes, record profits, record dividends and a record high in the share price. Philip Gostelow
Stockpiles of iron ore at Chinese ports, an important indicator of demand and prices, have been above 120 million tonnes over the past month, but Fortescue's director of sales and marketing Danny Goeman said Chinese stockpiles could fall below 100 million tonnes in the first three months of 2021.
Iron ore stockpiles have not been below 100 million tonnes since mid 2016, and were as high as 160 million tonnes in mid 2018.
''Feedback from our customers and other industry observers in China in the last few days suggests that the ongoing strength in steel demand may lead to iron ore inventories in China ports being drawn down further, with some suggesting that port levels may approach 100 million tonnes during the first quarter of 2021,'' he said on Wednesday.
Mr Goeman said the slide in Chinese iron ore stockpiles would be ''driven in part by increased iron ore demand outside of China and lower than expected supply from Brazil.''
He said customers were concerned about securing their iron ore supply ahead of the Australian cyclone season, which typically runs between December and May and often disrupts exports from Western Australia.
Mr Goeman said global steel production was now close to the levels seen before the coronavirus pandemic forced mills to shutdown in many nations.
Mr Goeman said Brazilian iron ore miner Vale was likely to face "significant ongoing challenges" to its plan to expand supply above current levels of about 300 million tonnes per year.
''Our view remains that considerable challenges and uncertainties persist in bringing on this additional supply,'' he said.
''We envisage significant ongoing challenges associated with expansions of Brazilian supply, particularly given the number of projects requiring completion and the related project approvals.''
Vale plans to increase export volumes by about 100 million tonnes over the next three years by resuming production at mines that were closed in the wake of a deadly dam collapse in January 2019.
Sliding doors moment
Vale chose not to proceed witha memorandum of understanding struck with Fortescue chairman Andrew Forrest in 2016, which would have seen the Brazilian company buy as much as 15 per cent of Fortescue and enable the two companies to blend a portion of their production.
Fortescue shares were fetching about $3 on the day the memorandum of understanding was announced; the stock was fetching $21.69 in afternoon trade on Wednesday.
Fortescue has posted consecutive record profitsover the past two years, and is a strong chance of setting a third consecutive record profit in fiscal 2021.
Fortescue chief executive Elizabeth Gaines said on Wednesday there was "absolutely no change" tothe dividend policythat sees Fortescue pay out between 50 per cent and 80 per cent of net profit after tax as dividends.
Ms Gaines told investors on Wednesday that Fortescue was "targeting the upper" end of that range, and implied that any special dividend would be considered a subset of total dividends within that policy range.
The company will spend up to $US3.4 billion on growth and sustaining projects this year, including on the final works at its $US1.375 billion new mine at Eliwana.
First ore from Eliwana in the Pilbara region was processed this week and the company expects to have Eliwana product on a train to Port Hedland before the end of the month.
With Eliwana almost complete, Fortescue chief financial officer Ian Wells said the company did not face another expensive investment phase in another mining hub until around 2025.
Aside from replacing depletion at other mines, the quality of Eliwana's mine will bolster Fortescue's ability to sell ore with higher iron grades and by extension, secure better profit margins.
Fortescue has traditionally sold ore with iron content between 56 per cent and 59 per cent, but Eliwana will underpin the sale of ore with iron content of 60.1 per cent.
Almost 18 million tonnes of the higher grade product, known as West Pilbara Fines, was shipped by Fortescue in the year to June 30, accounting for about 10 per cent of Fortescue's export volumes in the year.
Eliwana will allow Fortescue to increase export volumes of West Pilbara Fines closer to 40 million tonnes per year, which would be more than 20 per cent of its total volumes.
Fortescue is close to completing a 143 kilometre railway line to connect Eliwana to its existing rail networks.
Fortescue is pursuing a range of clean energy projects and Ms Gaines said a study into a hydrogen production project in Tasmania was likely to be the first to go before the Fortescue board for an investment decision in 2021.
(20min delay)