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Wednesday, 24 August 2016

China urbanisation

Chinese cities growing

An extraordinary turnaround story and set of numbers was reported by iron ore producer Fortescue Metals Group (FMG) this week, with reported statutory profit surging back in FY2016, and a profit after tax of US$985 million being reported. 

This has been achieved in part through cost reduction, with iron ore prices remaining much lower than the levels seen in FY2014.

One slide of interest from the corporate presentation highlighted how 300 million Chinese are still expected to urbanise at a rate of around 16 million per annum, underpinning demand for Australia's iron ore and coal over the medium term. 


Source: ASX (FMG)

Perhaps not surprisingly, FMG believes that iron ore demand and supply are fairly evenly matched.

Other analysis, including from Westpac, suggests that the iron ore market is oversupplied and that iron ore prices will surely fall later in 2016.

Coking coal on the other hand is in the midst of a spectacular rally, with prices up by more than 60 per cent since mid-February.

Perhaps the Reserve Bank's Index of Commodity Prices will be staging a further rebound in due course, having already jumped in July.

FMG has reduced its operating costs impressively, with its C1 operating costs slashed across 10 consecutive quarters to just US$14.31 per wet metric tonne in the June 2016 quarter, competing fiercely with BHP Billiton and Rio Tinto for the mantle of lowest cost producer in Australia.

The results were a beat across almost every metric, resulting in a substantial US$2.7 billion in free cashflows. 



This has allowed the group to reduce its net debt significantly in FY2016 to below US$5.2 billion, including cash of US$1.6 billion.


Being a high leverage/high beta stock, the share price performance this year has been extraordinary, exploding from below $1.50 in January to touch above $5 earlier this week. 

A great result for Fortescue, and those shareholders who stayed the course will very much enjoy the 12 cents per share final dividend.

The Reserve Bank's Commodity Price Index for August is due to be released next week.