Fortescue suspends shipping contracts

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December 05, 2008

IRON ore miner Fortescue Metals has suspended contracts on about two-thirds of its ore shipments, in an effort to switch to greater reliance on deals that require the buyer to freight the product.

Fortescue said it was suspending all long term shipping contracts of affreightment and consecutive voyage contracts.

This would not affect marketing or total volumes, the miner said, rather the mix of sales between the suspended contracts and the other major form of shipment, FOB (freight on board).

The suspended contracts require Fortescue to supply ore on a landed basis into China. FOB contracts require the buyer to arrange shipment from Fortescue's facility in Port Hedland, in the north of Western Australia.

Fortescue didn't explain the reason behind the move, other than to say it was "on the basis of unforeseen circumstances''.

The move comes, however, amid a downturn in the steel business globally, particularly in Fortescue's key market, China, with many steel producers seeking to amend, delay or suspend shipments from Australian ore miners.

Contracts involving Fortescue paying for shipments into China that remain on the docks would present different cost implications to deals that involve ore sitting in Fortescue's stockpiles in WA.

"Fortescue ... advises that consistent with the continued prudent management of its business and in reflection of changed operating conditions, it has exercised suspension of all of its long term CFR shipping Contracts of Affreightment and Consecutive Voyage Contracts,'' Fortescue told the Australian stock exchange.

"The changed arrangements as a result of these suspensions, should not affect Fortescue's marketing program in regards to volumes of product shipped, just the split between CFR and FOB sales terms.

"To date, approximately 2/3 of Fortescue's sales have been on CFR terms but this is likely to reduce to around 1/3rd of sales...

"The changed arrangements are in direct response to market conditions demanding greater FOB sales,'' Fortescue said.

As adapted from Australian Associated Press

This does not bode well for the dry bulk sector and puts more pressure on Owners and Operators