Fortescue Lands Major Chinese Iron Ore Order Amid Gloomy Outlook of Sector

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Researched by Industrial Info Resources (Sugar Land, Texas)--Fortescue Metals Group Limited (ASX:FMG) (Perth), Australia's third largest iron ore mining company, announced a week ago that it had signed a deal to supply 5.5 million tons of iron ore to a leading Chinese steel producer, whose name has not been disclosed. The iron ore is expected to be supplied in 2009 and will amount to about 10% of the company's iron ore output planned for next year. The current production capacity of 4.5 million tons per year will be ramped up to 5.5 million tons per year next year. News of the sales agreement caused Fortescue's share prices to shoot up by 40%.

Although the Chinese company's name has not been disclosed, Fortescue has said that it is one of the leading five steel mills of China. The Chinese steel maker is an existing customer of Fortescue and purchased 2 million tons of iron ore in 2008. The new deal is merely an extension of the current deal. The new order is a rare instance of a bigger order in the current gloomy outlook surrounding the sector. The declining demand for steel in China and other nations has had worldwide iron ore producers apprehensive about next year's prospects. A largest steel-producing country, China's crude steel production is expected to decrease by 15% in 2009.

According to Fortescue sources, the company sold 6.8 million tons of iron ore in the quarter ending on September 30 and made a profit of $232 million from the sale. The company has not released any data on how the profits compare with previous quarters. In another prudent move, Fortescue turned its current weakness in bond markets to a strong point by buying back a portion of the company's own bonds at a 32% discount.

The current economic crisis has brought into focus the necessity of saving and cutting costs rather than overleveraging on the available means as has happened in the Western world over the last two decades. Countries such as Brazil and those in Southeast Asia are likely to receive a great deal of attention in the coming years since these countries are seeing large numbers of people coming out of poverty and joining the world economy. The phase is likely to continue for the next two decades or so. Freer trade globally has the greatest chance of pulling the economy out of the current recession.

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