Fortescue Stuns Global Exporters with China Deal

Submitted by Jim Thesiger on 18 August, 2009 - 05:56

Fortescue Metals Group (FMG), an iron exploration company has shaken the global iron ore export industry by sighing a deal that links the company’s supply of discounted iron ore to the steel industry of China with as much as $6 billion US dollars in cheap Chinese loans. The deal has challenged the initiatives taken by Rio Tinto to extend its May benchmark settlement as far as iron ore price is concerned in the Chinese market. According to the deal, Andrew Forrest’s Fortescue will supply 18 million tonnes of iron ore to China by the end of December at a discount rate of 3 percent to the price that Rio Tinto fixed with the non-Chinese steel producers in the month of May.

If the discounted price becomes the benchmark price in China for iron ore then this will cost as much as $A450 worth of revenue for the Australian exporters. However, despite the Fortescue discount deal, Rio didn’t show any sign of backing off from its intention to expand its May benchmark arrangement with China. Rio described the Fortescue deal “irrelevant” as far as their current pricing strategy is concerned. BHP Billiton was yet to come up with any comments but may also consider the Fortescue issue irrelevant.

In a statement, Mr. Andrew Forrest described the deal as landmark agreement. It is to be mentioned that the agreement is conditional on acceptable terms being reached by 30th September on a Chinese consortium providing Fortescue with $5.5 billion to $6 billion US dollars. In China it was stated that the funds would aid Fortescue Metals to boost up its production to a yearly rate of 95 million tonnes. Mr. Forrest termed the deal as an initiative to stablise the iron ore market of China. He also added that it would not be appropriate to see it as the company is putting its personal interest over national interest.