Futures & Commodities

Fortescue chairman Andrew Forrest says iron ore oversupply remains despite price rally

WILLIAM WEST | AFP | Getty Images

An iron ore oversupply still needs to "work through the system," Fortescue Metals Group chairman Andrew Forrest warned, even after a recent rally in the price of the steel-making ingredient.

Forrest, who was speaking to CNBC on the sidelines of the Boao Forum for Asia, added that the "errors" of iron ore majors in flooding the market with supply would "plague China, Australia and the iron ore price for a good period of time."

Forrest has called for an Australian inquiry into the iron ore industry, after low-cost, high-volume production swamped the market, sending prices assessed by The Steel Index to a record low of $37 a ton in December.

The slump in iron ore prices has had a "cataclysmic effect on the Australian economy" and led to a "wanton loss of jobs," the veteran miner told CNBC at the conference on Hainan island in China. "An inquiry could've stopped oversupply a year ago."

Andrew Mackenzie, Chief Executive Officer BHP Billiton speaks at the Minerals Week conference, Canberra on June 3, 2015.
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BHP Billiton, the so-called Big Australian, trimmed its full-year iron ore forecast in January, after output was hit by a damn-burst at its Samarco joint venture with Vale in Brazil. Fortestcue's larger rival, Rio Tinto, said at the same time that it expected to boost production and shipments in 2016.

Amid a downturn in the commodity cycle, top miners have ramped up production in order to cut their costs per unit, which in turn has added to the oversupply,

Forrest did not specify a price target or a time frame for the digestion of oversupply but his comments come after a rally in iron ore that pushed spot prices as much as 48 percent higher so far this year to $63.30 a ton.

On Monday the price of iron ore, including cargo and freight, for immediate delivery to the port of Tianjin, was $58 a ton.

To increase Fortescue's market share in China amid the ongong commodities downturn, this month the company announced a deal with Vale that could see the Brazilian giant take a minority stake in the Australian miner.

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"[It's] certainly an out-of-the-box idea that we should actually cooperate with our arch competitor to create a product that would be the most beneficial, the most competitive, the most needed iron ore material which has ever entered China," Forrest said.

"Vale can't do it on its own, no chance. Fortescue couldn't do it on its own, no chance."

But together, the pair would be able to produce the same quality of iron ore as would be produced by rival Rio Tinto, which is viewed as the benchmark in China.

The deal would be a win-win in that it would also create an even more competitive Chinese steel industry, Forrest said.

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