With the iron ore price firming up after two weeks of falling prices, Fortescue Metals has reaped the benefits today.
Benchmark 62% fines are up 3.1% to $87.92, 65% fines are up 2.8% to $98.10 with 58% fines receding 0.2% to $67.85.
Meanwhile, the share price of Fortescue Metals Group Ltd [ASX:FMG] is up 6.94%, trading at $6.39 per share.
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Fortescue Metals share price benefits from iron ore price
Iron ore prices have experienced a renaissance following a dam disaster in Brazil.
Fortescue has been the primary beneficiary of the tragedy, as it is a pure play iron ore miner.
There are a few factors behind the price action, which are worthwhile to unpack.
Previously we have discussed declining steel mill margins have led to a slowdown, which is still an ongoing issue. This has had flow on effects to inventories.
As reported by Reuters, a purchase manager at a large steel mill in Hebei is quoted as saying:
‘We are holding off restocking and running with a low inventory since current prices are too high.’
But today, the emphasis seems to be on smog alerts again.
Tangshan, China’s top steel producing city has issued a level one smog alert effective through to 6 March.
This is the most severe production curbing measure.
When air quality is a concern, the price of higher grades has a tendency to surge as they produce a better yield for the same amount of emissions.
At the lower end of the spectrum, FMG’s Super Special Fines, with an iron ore content of 56.7%, is currently at a discount of 16% compared to the benchmark 62% iron ore versus 33% in February.
Will Fortescue Metals’ run continue?
But there could be a cap on Fortescue’s run.
Increasingly, mill purchase managers are looking further afield in the search for margins.
One Jiangxi mill purchase manager said that it had purchased iron sand from Indonesia recently, Reuters reports.
This could play into the hands of smaller iron ore miners in South Africa, India and Australia.
Although it is operating primarily at the higher end of the grade spectrum, Mount Gibson Iron Ltd [ASX:MGX] could be worth a look.
It’s been on a solid run this year, defying market dynamics:
Food for thought, especially if the smog alerts continue.
For Money Morning