Fortesc-who? With all eyes on the big three iron ore producers, few expected anyone outside the oligopoly to break the deadlock with China's mills. And yet Fortescue Metals of Perth, ranked 59 places below Rio Tinto on the list of the world's biggest materials companies by market capitalisation, has reached what it calls “a groundbreaking agreement” with Baosteel, the biggest steelmaker. Fortescue's output in the six months to December will be sold at US$55.50 a tonne, about a 3 per cent discount on the price Rio, the world's third-biggest producer by market cap, set in May with non-Chinese mills.
Whether the agreement will be copied by anyone else is beside the point: with Chinese spot prices at $110, there is every incentive for BHP et al to ignore it. More important is what it means for Fortescue, a six-year old company that has been shipping ore for a little over a year. Since Rio slipped Chinalco's grasp to merge its Australian iron ore assets with BHP Billiton, China has needed an effective counterweight to the big two in the Pilbara. With this deal, along with the promise of up to $6bn from Chinese banks in general-purpose financing, it is obvious that it has found it.
Fortescue, led by chief executive and 31-per cent shareholder Andrew “Twiggy” Forrest, had always been an energetic self-promoter. Yet while the group's boast of being “a new force in iron ore” has rung hollow – especially last year, when it was paying suppliers in scrip to preserve cash for interest payments – it is now moving beyond slogans. An equity raising from Hunan Valin in February made the group takeover-proof; now it will have access – presumably on sweetheart terms – to billions more to finance growth and repay expensive bonds. Rio and BHP may scorn this putative benchmark. But the bigger threat cannot be dismissed as lightly.
