Fortescue in box seat with iron ore surge
The red earth beneath Andrew "Twiggy" Forrest must have been shrinking at an incredible rate as he stood over his self-made empire in the Pilbara earlier this year.
In the five months to June, the Fortescue Metals founder witnessed a 30 per cent fall in the price of his company's most valuable commodity, iron ore, from its 2013 high of $US158 ($170) to $US110 per tonne, with many analysts predicting the slide to continue.
To make matters worse, Fortescue's share price tumbled 45.8 per cent to $2.92, slashing the value of Mr Forrest's 33 per cent stake from more than $5.5 billion to about $3 billion.
But in the second half of the year, defying expectations, the iron ore price began a resurgence. From its low, reached at the end of May, it quickly picked up much of the lost ground, sitting between $US130 and $US140 per tonne since mid-August.
Not to be outdone, Fortescue shares have surged 96.9 per cent, since hitting their low in June, to $5.78 in late trade on Friday.
Mr Forrest's stake in Fortescue is now worth close to $6 billion.
China's continuing demand for Australia's raw materials has been the driving factor behind the strength of the iron ore price and Fortescue.
"Iron ore is the most strategic commodity to China," ANZ head of commodity research Mark Pervan said. "It is their highest dependency commodity; they import about 70 per cent of their iron ore requirements."
And that dependency is expected to rise. Communist leaders at the third plenum spelt out that China was keen to have less impact on the market, sending a clear signal that the world's second-largest economy was unlikely to keep propping up unprofitable domestic state-owned operations.
"State-owned enterprises that have high-cost, unprofitable domestic production, and are polluting the atmosphere aren't going to be propped up, that's clearly the signal that China is trying to send," Platypus Asset Management senior analyst Anna Kassianos said. "But things in China never happen fast ... [it could take] a couple of years for that to play out."
Australia provides just more than 50 per cent of China's iron ore imports, but as expensive state-owned enterprises begin to shut down, that market share is likely to increase.
"In terms of iron ore supply, China will be more reliant on product coming from Australia," Ms Kassianos said. "Australian supply is much cheaper when you compare it to Brazil, especially on the freight rate differential to China, so therefore Australian ore supply is much better positioned to take advantage of any [increase in] demand."
But not every Australian iron ore miner will reap the benefits of increased volumes to China. With infrastructure vital to supply lines locked up between a handful of companies, the success of smaller players will rely on deals struck with the likes of Fortescue, Gina Rinehart's Hancock Prospecting and QR National.
"There are others which are constrained because they don't have infrastructure solutions to complement their growth, like Atlas and Brockman. They're stuck because they're reliant on deals [and] you can't necessarily say deals will get done in the time frame that is required and at the right price," Ms Kassianos said.
Because of these constraints, she said BHP and Fortescue were the best placed local miners to benefit from increased volume output to China, albeit at a lower price.
Analysts agree long-term iron ore prices will decline, but they disagree by how much and when.
Mr Pervan expects the price to come off a bit but to hold in the $US120-$US130 per tonne range for the next 12 months.
"The issue right now is that steel production [in China] is running at very high levels and this is creating this upside support for iron ore, well above where people thought it was going to be," he said.
Goldman Sachs commodities analyst Christian Lelong said he expected the iron ore price to hold in the short term and then begin to decline from the second quarter of next year, and then further in 2015.
"This year, the market was in balance," he said. "But next year, supply starts to grow ahead of demand and that means you start seeing some mine closures, initially in China, but we think it also means the iron ore price starts to trend lower towards its long-term level, which we estimate at around $US85 a tonne."