The iron ore price equation that makes Fortescue attractive for China – – by Anne Hyland (Australian Financial Review – May 29, 2015)

CITIC Group and Baosteel Group, which are said to be interested in Fortescue Metals Group, are two of the most politicised companies in China. Baosteel is China’s leader in the steel industry and CITIC was anointed to make significant investments outside China, such as the $10 billion Sino Iron project, which has been described as the worst mining investment in Australia in the past decade.

What is almost certain is that CITIC and Baosteel, which is developing an iron ore project with Aurizon, won’t bid against each other for Fortescue or other resource companies. It would be politically unpalatable in China and it’s typically not what China Inc does.

While there would be a dozen companies in China capable of taking out Fortescue, only one would get the green light, say veteran China observers.

At the Stockbrokers Association conference on Thursday, Li Xinchuang, president of the China Metallurgical Industry Planning Association, firmed up speculation with comments that Fortescue would benefit from a Chinese investor, while saying he didn’t believe the argument that there was a global oversupply of iron ore.

It’s an argument made by Fortescue’s founder Andrew Forrest, who has attacked BHP Billiton and Rio Tinto on their output, while saying relatively little about the world’s biggest producer of iron ore, Brazil’s Vale.

Indeed, Xinchuang called Forrest out on his claims by pointing out that Fortescue grew its production to a critical mass of 155 million tonnes over the past few years, which has significantly brought down the miner’s cost base. Xinchuang noted that for all the iron ore miners it was a cost and volume game.

A Goldman Sachs note sent out this week described the view of voluntary production cuts, which were the implication of Forrest’s megaphone politics, as “misguided” and “implausible” as it would go against the prevailing trend of improving efficiency, saying its own analysis indicated that mining productivity in the Australian iron ore industry is increasing by 4 per cent per annum, resulting in higher output and lower unit costs.

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