China's growth benefits Australian miners

China's ongoing urbanization drive and continuous economic growth will keep bringing stable demand for Australian iron ore, said a top official at Fortescue Metals Group Ltd, the country's third-biggest iron ore producer.

"Although China's economic growth is slowing down, the 7 percent growth rate is still very strong," said Neville Power, chief executive officer of FMG, which is also the world's fourth-largest iron ore miner.

A manager inspects ore processing equipment near a mine of FMG, the world’s fourth largest iron ore miner. Despite an economic slowdown, China’s advancing urbanization and the growth will continue to create demand for Australian iron ore.DU JUAN / china daily

Power added that he believes that Chinese demand for iron ore will continue to increase.

Regarding the company's debt load, he also expressed confidence in the future.

"We're not having any pressure on financing," he said. "Our balance sheet is very strong and we have no time pressure on repaying the debt."

During the last Australian fiscal year — from July 1, 2012 to June 30, 2013 — FMG's fixed-asset investment reached $6.3 billion, the highest level since the company's establishment in 2003.

The company's debt is now at $12 billion, with $2 billion of cash in hand. However, FMG doesn't have any debt to repay before November 2015, according to the company.

Meanwhile, the company's production capacity is growing rapidly and the contracts with Chinese steel companies are steady, which can generate cash, industry observers said.

"Costs can be an issue for a company like FMG, which is highly leveraged, but their production volume is going up, which means that if prices decline they can still be profitable," said Sebastian Lewis, editorial director of Platts China, a commodities information provider.

In the last few months, international iron ore prices have been falling, and most analysts and industry players believe that they will continue to drop until they reach a reasonable level.

According to price forecasts for iron ore with 62 percent iron content by UBS, CLSA and RBC, prices will keep falling in the long term. CLSA estimates that prices will drop to around $90 a ton in 2014.

Lewis said that at the current level, which is about $120 a ton, most mining companies are making money.

Andrew Forrest, FMG's founder, said that a drop in iron ore prices will not affect the company.

He said the company will continue to focus on China and the iron business for the foreseeable future, but it's possible that the company will also invest in other commodities which China has demand for.

Up to 95 percent of FMG's iron ore is shipped to China.

Founded in 2003, the company spent five years on exploration, design and infrastructure construction before it shipped the first iron ore load to China's Baosteel Group in May 2008.

So far, the company has supplied more than 240 million tons of iron ore to China.

In the 2013 fiscal year, the company's iron ore output was 80 million tons, and the figure is expected to grow to 127 million to 133 million tons in the 2014 fiscal year. By the end of this year, the company will have a total production capacity of 155 million tons. It doesn't have any immediate major capacity expansion plans after that, according to Power.

Experts said FMG was lucky enough to grasp the "golden age" of China's steel industry in the past 10 decade. The country's steel output increased from 200 million tons in 2003 to 700 million tons in 2012.

At the same time, China's dependency on foreign iron ore supplies increased from 40 percent to about 70 percent currently.

Due to China's growing demand and rising costs, imported iron ore prices soared from $30 a ton in 2003 to the record level of about $200 a ton in 2008.

And although the company has a super-high dependency on the Chinese market, Power said that this is not risky.

"FMG's shipping cost to China is lower than Vale SA, the Brazilian mining giant, and we'll continue to reduce it," he said. "We're making efforts to help our most important client — Chinese steel mills — to be profitable and sustainable."

The company is also looking for opportunities to explore other markets, such as Europe, Japan and South Korea, according to Power.

The Pilbara region in Western Australia, where FMG's iron ore tenements are located, is the most competitive source of seaborne iron ore supplies to Northeast Asian economies and increasingly to emerging economies in Southeast Asia, South Asia, the Middle East and North Africa, according to Power.