Mining giant Fortescue Metals Group has warned a protracted stand-off with Beijing over the price of Australia’s biggest export commodity, iron ore, may force it to curtail production at its huge mines across the Pilbara if the deadlock does not break soon.
Fortescue, whose founder and chairman is billionaire Andrew “Twiggy” Forrest, sells almost all of its iron ore to China’s massive steel industry. However, the miner has been locked in months-long contract negotiations with China Mineral Resources Group, the centralised buying agency set up by Beijing to leverage its purchasing power against foreign suppliers.
Following reports that the agency has instructed Chinese steel mills to restrict or delay certain Fortescue shipments until a pricing deal is struck, the company has disclosed that it exported more iron ore than it had managed to sell during the three months to September 30.
If the negotiations remain unresolved by the end of the year, “operations may be affected, potentially including adjustments to production”, Fortescue told investors on Thursday. The warning raises the prospect that the company could be forced to slow down or suspend some of its mining operations imminently.
Fortescue’s shares slumped more than 4 per cent on the news in afternoon trade in Sydney.
The dispute poses a significant threat to Australia’s broader economy. Iron ore, the key raw material used to make steel, is the nation’s most valuable export, generating more than $100 billion a year in export earnings, and routinely accounting for as much as 5 per cent of gross domestic product. Even slight sustained declines in export volumes or prices can have a major impact on state and federal budget revenues.
The stand-off over pricing and future supply terms with Fortescue presents the latest test of China’s attempt to break the pricing power of the Australian and global mining giants that it relies on to feed its steel mills’ blast furnaces.
Since its establishment in 2022, China Mineral Resources Group has sought to consolidate the bargaining power of Chinese steel mills and force price concessions in contract negotiations with suppliers, including Australia’s BHP, Rio Tinto and Fortescue.
BHP and Rio Tinto, Australia’s largest miners, have also felt the pressure from Beijing in their negotiations. Chinese steel mills were banned from purchasing certain grades of BHP’s iron ore last year over a pricing stalemate. After months of wrangling with the Chinese state buyer, the mining giant signed a contract in April, freeing up China’s mills to resume their purchases.
Meanwhile, Rio Tinto has also signed a new iron ore supply deal with Beijing , people familiar with the matter told Reuters on Wednesday. China Mineral Resources Group verbally notified some steel mills of the agreement this week without giving further details, they said.
Fortescue is more dependent on China’s iron ore deal than its two larger rivals, which have more diversified operations spanning other commodities including copper, which now generates more than half of BHP’s and more than a third of Rio’s earnings.
Asked on Thursday why Fortescue had not yet ceded to the Chinese agency’s demands for a price discount, Fortescue chief executive Dino Otranto replied:“Is that in the best interests of the industry in the long term? Is that in the interests of Australia in the long term?”
“That’s why we’re here,” he explained. “We’re facing the pressure. We’re leaning into it.”
Gus Pichot, Fortescue’s head of growth, told analysts that the company wanted to preserve “fair market practices” and was “doing everything we can to ensure we’re taking care of our shareholders”.
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