Chinese demand for iron turbocharged Fortescue Metals’ profits amidst the Covid-19 pandemic

GlobalData Energy 8 January 2021 (Last Updated January 8th, 2021 09:41)

Fortescue Metals Group (FMG), based in Australia, saw a strong momentum in 2020, while many businesses around the world suffered greatly and others permanently shut their doors, as a result of the COVID-19 pandemic and related restrictions implemented by the governments.

Chinese demand for iron turbocharged Fortescue Metals’ profits amidst the Covid-19 pandemic

Australian mining giant sees robust growth during the first year of the pandemic.

Fortescue Metals Group (FMG), based in Australia, saw a strong momentum in 2020, while many businesses around the world suffered greatly and others permanently shut their doors, as a result of the COVID-19 pandemic and related restrictions implemented by the governments.

Shares in the Australian iron ore giant more than doubled last year, which brought the personal wealth of its founder and chairman Andrew Forrest, who owns 36% of the company, to AUD23bn ($15.8bn).

FMG is the fourth largest iron ore producer in the world after BHP, Rio Tinto, and Vale. It forecasts its 2020 fiscal iron ore shipments at around 177 million tons. With a gross profit margin of 55%, over the past 12 months, which is higher than Netflix (39%) or Amazon (40%),

FMG paid out AUD3.7bn ($2.5bn) dividends, keeping its investors happy. Also, the company’s return on equity in 2020 was 40%.

Robust demand from China’s steel mills behind iron price surge.

Fortescue Metals Group became one of the biggest beneficiaries of the soaring iron ore price, which hit a nine-year high in December 2020. Iron ore prices started 2020 at $91.5 per ton and finished the year at $163.7 per ton, which demonstrates an increase of 78.9%.

While many of Australia’s top export commodities, such as coal and liquefied natural gas, have faced sharp falls due to various impacts of the pandemic, iron ore has soared, providing a windfall to mining giants.

The price of the steelmaking raw material has been lifted by strong and sustained demand from China’s steel mills, which were ramping up output to stimulate the economy. China is by far the world’s top consumer of iron ore, buying more than 70% of seaborne cargoes. At the same time, the stockpile of iron ore in China is declining.

Another factor which worked to Fortescue’s advantage was softer-than-expected output from overseas iron ore producers, such as Brazil’s Vale. Strong iron ore demand has also boosted the Australian dollar higher, after underpinning Australia’s exports despite increasing geopolitical tensions.

Iron ore gains expected to continue supporting Federal Budget and mining giants in 2021

Fortescue was not the only mining company whose share price experienced strong gains in 2020. The BHP Group Ltd recorded share price increase of 9%, while Rio Tinto jumped 13.4%. During the same period, a private Australian mining company Hancock Prospecting reported a 50% surge in profit, while its owner Gina Rinehart doubled her personal wealth and topped The Australian Financial Review’s “2020 Rich List” with an estimated AUD29bn ($20bn).

With the COVID-19 threat not yet resolved, it is hard to predict how the 2021 is going to unfold, but iron ore continues to trade at elevated levels. The FMG share price has surged by 3.5% again in early January 2021, showing a strong start to the year. Industry experts are expecting the iron ore gains to continue, at least in the first quarter of 2021. It means a strong iron ore price could continue to support the Australian Federal Budget and the mining giants’ business.