FORTESCUE Metals chairman Andrew Forrest defiant in the face of sharp falls in iron ore prices and mounting evidence that the mining boom is rapidly losing steam splashed out nearly $40 million to shore up confidence in the mining company he founded.
In what is being seen as an attempt to flush out short-sellers circling the company, Mr Forrest, who now holds just shy of one-third of the miner, declared he would "continue to accumulate" shares in Fortescue, despite shares slumping 15 per cent in the past week to a more than two-year low.
The move came as spot benchmark iron prices tumbled to a post-financial crisis low of $US90.30 and the Chinese giant Baoshan Iron and Steel warned that global demand for iron ore would remain subdued, and could even drop.
"I certainly expect prices to bounce," Mr Forrest said in Perth. "I think it's been completely overdone."
With major miners BHP Billiton and Rio Tinto trading near milestone lows, and bulk commodity prices continuing to fall, yesterday's ABS Investment intentions survey indicated that Australia's mining investment boom was also gradually coming off the boil.
Nearly $1 billion in value was wiped off major listed mining services providers yesterday, which are expected to be hit especially hard by project delays.
The Utah-based Boart Longyear plunged 37 per cent, while ALS (formerly Campbell Bros) was down 8.7 per cent, Ausdrill down 11 per cent and Imdex off 19 per cent.
Confidence within the industry was rocked by last week's news that more than $50 billion worth of projects, including BHP Billiton's planned Olympic Dam expansion, have been indefinitely put off. Mining and media magnate Kerry Stokes insisted Australia's economy would withstand falling commodity prices and a slowdown in China.
"Our mining industry is sound," he said. "We may have to take the tops and the bottoms off, but at the end of the day we have a very sound opportunity to build long-term futures as a supplier to our eastern neighbours, including China and Japan and India."
The slump in commodity prices stems largely from fears that China's economic growth is slowing.
Mr Forrest yesterday acknowledged the days of iron ore prices at $US180 were over, but added that yesterday's spot price was an "overreach on the other side".
He said the sharp drop in prices was due to distressed steel mills in China running down their inventory stockpiles, but they would have to return to buying iron ore within months to fuel the underlying growth in construction in the Chinese economy.
Mr Forrest's Fortescue share purchases, totalling $39 million across two separate tranches, were small compared with his existing stake, but also follow a $105 million buying spree in June.
Beijing-based investment analyst Tim Murray, of J Capital Research, said he agreed that iron ore prices would begin to edge up by October as demand stopped falling. "I just think the destocking has been pretty large and it's hard to continue," he said.
Patersons' Alex Passmore said a floor would likely still come, but it needed some time. Patersons last month downgraded its long-term forecast to $US80.
Mr Passmore said that because of earnings downgrades that he forecasts would flow through the market, hitting the financial year ending in 2014, iron ore stocks still had some way down ahead before a pick-up.
"They can trade below valuation for some time," he said. "Over time the stocks will be proven to be cheap at current levels, but at the moment if you're buying these stocks you're buying cum-downgrade for financial year 2013 and 2014."
Frequently Asked Questions about this Article…
Why did Fortescue chairman Andrew Forrest spend nearly $40 million buying Fortescue shares?
According to the article, Andrew Forrest bought about $39 million of Fortescue stock across two tranches to shore up confidence in the company and to try to flush out short-sellers. He said he would “continue to accumulate” despite recent share weakness and had already completed a $105 million buying spree in June.
What was happening to iron ore prices when Forrest made the purchases?
The article says spot benchmark iron ore plunged to about US$90.30, a post–financial crisis low. Prices had fallen sharply from earlier peaks (Mr Forrest acknowledged prices around US$180 were over) and the slump was being driven largely by destocking at Chinese steel mills and weaker global demand.
How did major miners like BHP Billiton and Rio Tinto fare amid the price slump?
The article reports BHP Billiton and Rio Tinto were trading near milestone lows as bulk commodity prices fell. The sector was under pressure and confidence was shaken by news of postponed projects and lower demand for iron ore.
What was the impact on mining services and smaller suppliers?
Nearly $1 billion in market value was wiped off major listed mining services providers. The article gives examples: Utah-based Boart Longyear plunged 37%, ALS (formerly Campbell Bros) fell 8.7%, Ausdrill lost 11% and Imdex slid 19% as projects were delayed and demand weakened.
What explanations did Forrest and analysts give for the sharp price fall?
Mr Forrest said the drop was largely due to distressed Chinese steel mills running down inventory stockpiles (destocking), and he expected mills to return to buying within months to fuel construction growth. Beijing-based analyst Tim Murray (J Capital Research) agreed destocking had been large and predicted prices would begin to edge up by October once demand stopped falling.
Did any analysts change their long-term iron ore forecasts because of the slump?
Yes. The article notes Patersons downgraded its long-term iron ore forecast to US$80 per tonne. Patersons' Alex Passmore said a price floor may still come but would take time, and warned earnings downgrades expected for financial years 2013 and 2014 could push iron ore stocks lower before a recovery.
Are mining investment plans being affected by the commodity slump?
The article says an ABS investment intentions survey indicated Australia’s mining investment boom was gradually coming off the boil. Confidence was further rocked by reports that more than US$50 billion worth of projects, including BHP’s planned Olympic Dam expansion, have been indefinitely put off.
What key signals should everyday investors watch in this market environment?
Based on the article, everyday investors should watch spot iron ore prices, signs of Chinese steel mill destocking or re-stocking (demand), announcements of project delays or deferrals (like Olympic Dam), major miners’ share movements, and analyst commentary or earnings downgrades—since these factors drove the volatility described in the story.
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