China Mineral Resources Group (CMRG), the state-backed iron ore buyer, has reportedly directed some Chinese steel mills to raise questions regarding the quality of Fortescue Ltd.'s new low-grade iron ore product, known as Fortune Fines. This directive comes amid difficult negotiations between CMRG and Fortescue over a long-term supply contract. The Fortune Fines product has not yet been shipped, with first shipments scheduled for July. This move by CMRG indicates an effort to exert pressure on Fortescue during the contract talks, which CEO Dino Otranto previously described as an "arm wrestle".
Sources familiar with the situation indicate that CMRG has asked steelmakers with significant exposure to Fortescue ore to engage with the miner about the quality concerns. While disputes over quality and marketing of new products are not uncommon, this action follows CMRG's earlier protracted negotiations with BHP, which concluded with an agreement earlier this year. Some anonymous sources even suggested that CMRG might impose a purchasing ban on certain Fortescue products, similar to the strategy used with BHP.
The current negotiations with Fortescue are reportedly not progressing well, with CMRG aiming for more favorable terms for Chinese steelmakers, which are operating on thin profit margins. In contrast, major iron ore miners typically enjoy profit margins between 70% and 80%. Fortescue, the world's fourth-largest iron ore producer, has been attempting to strengthen its position in China, including beefing up its senior leadership presence in the country. However, executive chairperson Andrew Forrest has criticized CMRG's actions, suggesting the group is trying to create a "cartel."
Despite the potential for a purchasing ban on Fortune Fines, traders and analysts expect minimal impact on overall iron ore prices if such a ban were implemented, as the product has not yet launched. Some traders were reportedly unaware of the product until recently. On the day of the news, the most-active iron ore contract on the Dalian Commodity Exchange saw a slight increase of 0.77%, and the benchmark July iron ore on the Singapore Exchange was up 0.72% in late trade.
