No More Discounts for China- Fortescue

Submitted by Jim Thesiger on 3 December, 2009 - 16:21

Iron ore exploration company Fortescue Metals Group (FMG) that owns considerable amount of iron ore is selling its ore to China at spot prices or Asian benchmark contract prices and will no longer go for the discounted rate. The decision was made after the company failed to win a $US6 billion worth of funding deal from that country. Fortescue sold its iron ore to China at a 3 percent discount in the earlier quarter and switched to the benchmark price in the current quarter. It is to be mentioned that the benchmark price was determined by the Australia based mining giant Rio Tinto along with the Japanese and Asian mills which was accepted by the Chinese mills as a temporary rate. However, Fortescue can still sell its iron ore to the Chinese mills at the discounted rate since it is yet to receive the payment from China for the ore that has been shipped in this quarter.

However, since currently the spot iron ore prices before freight is about 40 percent more than the contract prices, this was not likely. Mr. Forrest previously stated that Fortescue had broken an iron ore stalemate between the major miners and China by hitting its own discounted price for iron ore for the Chinese market.

While talking about the deal, Mr. Forrest mentioned that the agreement was conditional within the range of $US5.5 billion and $US6 billion worth of funding which the company was seeking from the Chinese banks on suitable terms by the end of September and the financing could not be secured within the deadline. Later the company denied revealing the price in which it was supplying iron ore to China. Speculation was there that Fortescue would keep supplying China with iron ore under the discounted rate and the Chinese mills stated that they were expecting that the agreement was not connected with the funding. Fortescue has no plans of going for another hit to the price negotiations while talks start again for the benchmark price for iron ore for the next year and willing to appear in its usual role- as a price taker in the industry.