wooden duck sucker rally approaching, page-17

A good read where FMG sits today and further down the track.

Fortescue steels itself for drop in demand

November 1, 2008

THE executive director of Fortescue Metals, Graeme Rowley, said it would be "irresponsible" not to reconsider its ambitious growth plans in light of the global economic crisis.

The iron ore miner this week said a

$2 billion planned expansion to 80 million tonnes of production a year could be delayed by up to six months, meaning it would now be complete by the middle of 2010.

"The marketplace in China does not fill you full of confidence [at the moment]," Mr Rowley told the Herald in Sydney yesterday.

But he added that the situation should improve, particularly if China proceeds with plans announced this week to build $US292 billion ($435 billion) of rail infrastructure in the coming years.

"That's a steel bonanza," Mr Rowley said.

Fortescue has only had to change one shipment so far when a letter of credit from a smaller mill in China was not accepted. It was able to sell the ore to another customer.

Mr Rowley said more such flexibility in deliveries could occur in the near term.

Fortescue, which will not ramp up to its initial annual production rate of 45 million tonnes until December or January, is only shipping iron ore fines until its lump circuit is completed in December.

Mr Rowley said the higher price of lump ore meant it was less attractive than fines to many Chinese customers. But Fortescue's contracts require each customer to accept a mix of 70 per cent fines and 30 per cent lump ore once its lump circuit is in place.

Fortescue does not have any stockpiles of ore at its port, since the need to keep the level of alumina - an impurity - in its iron ore low before a de-sanding plant is completed in December has restricted the speed at which it can mine. Mr Rowley said Fortescue hoped to have up to a few million tonnes of port stockpiles to help it keep deliveries constant during the cyclone season early next year.

He said the company would prefer to stockpile lump ore than accept a lower price than the benchmark set by rival Rio Tinto. "You don't want to get into ore discounting," Mr Rowley said. "It is a spiral then."

Unlike BHP Billiton, Fortescue is still willing to sign contracts at the benchmark price rather than prices linked to an index. Mr Rowley said Fortescue, whose customers are all Chinese mills, had spoken to potential customers in Japan and Korea.