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Fortescue automates further to cut costs

11 Apr 2018 03:31 (+01:00 GMT)
Fortescue automates further to cut costs

Sydney, 11 April (Argus) — Australian iron ore exporter Fortescue Metals hopes to offset wider discounts for its lower grade iron ore through increased use of autonomous trucks to improve productivity and push down costs.

Fortescue has introduced autonomous haulage trucks at its Christmas Creek mine, which together with the Cloudbreak mine, is part of its Chichester Hub in Western Australia's Pilbara region. It expects to convert 100 haul trucks at the hub in the hope of becoming the first iron ore mining hub in the world with a fully autonomous fleet.

Fortescue began introducing autonomous trucks at its Solomon hub, which is made up of the Firetail and Kings Valley mines, in 2013. The autonomous vehicles have move 500mn t of material in the past five years and achieved a greater than 30pc increase in productivity, according to Fortescue. This has helped Fortescue to move down the cost curve and offset some of the margin compression that it is experiencing because of the wide discount for its lower grade iron ore.

Fortescue, which will produce around 170mn wet metric tonne (wmt) of iron ore in the 2017-18 fiscal year to 30 June, plans to cut its cash production costs to $11-12/wmt in 2017-18 from an average of $12.60/wmt in 2016-17. At these levels Fortescue will have the lowest cost production per wmt in the Pilbara. UK-Australian mining firm BHP is aiming for cash costs below $14/wmt over the same period, while Rio Tinto achieved $13.40/wmt in 2017.

All three firms are focused on the use of automation to contain costs as they move into higher strip ratio parts of their mines and higher cost below water table mining. But Fortescue's margins are still significantly below those of BHP and Rio Tinto because of the wide discounts that its lower grade ores receive.

Fortescue last month cut its guidance for the 2017-18 full year price realisation to 65pc of the 62pc Fe benchmark from its previous expectation of 70-75pc, having reported an average realised price of 68pc of the benchmark cfr price during July-December. The firm had forecast that the discount would narrow once Chinese steel production restrictions were lifted. But this has not occurred with the discount for its 58.3pc blended fines widening to 35pc to the March 62pc index compared with a 33pc discount for February index linked cargoes. The discount for its 56.7pc SSF fines were unchanged at a 40pc discount to the March 62pc index. The SSF fines discount was last changed in October when it widened from 35pc in September.

The highly liquid Chinese portside markets are now the centre of trade for Fortescue iron ore and increasingly guide monthly contract adjustments. SSF is assessed at 281 yuan/wmt fot Shandong ports, a 38pc discount to the 62pc Fe PCX index at Yn453/wmt.

The Argus SSF seaborne equivalent is priced at $36.95/t and month-to-date is $36.91/t, a 40.2pc discount to the PCX month-to-date average of $61.74/t.

Wider discounts during July-December contributed to a 44pc fall in Fortescue's half-year profits to $681mn from $1.22bn for the same period last year.

Fortescue's medium-term plans to increase the Fe content of its ores so that more than 50pc have more than 60pc Fe are based on the development of its Eliwana deposit. But first production is not expected until 2019-20 at the earliest. It is also carrying out a feasibility study into the 9.5mn t/yr Iron Bridge magnetite project with a decision expected by the end of June. Fortescue owns 60pc of Iron Bridge, with the remainder held by a subsidiary of Chinese steel producer Baosteel and Taiwanese conglomerate Formosa Plastics.