Fortescue Metals Group believes it has weathered the worst of the price discounts that have been applied to its iron ore in recent months, but will push ahead with plans to increase the average grade of its product regardless.

 

The miner revealed its iron ore had achieved just 66 per cent of the benchmark iron ore price during the three months to December 31; a far cry from the period between 2014 and 2016 when Fortescue's product typically fetched between 86 per cent and 88 per cent of the benchmark price.

 

The deep price discounts were driven by Chinese steel mills' preference for higher grade iron ore in recent months, which has arisen from a desire to operate more efficiently and stronger profitability, which enabled the mills to buy the more expensive, higher grade iron ore produced by miners like Vale and Rio Tinto.

 

But with steel prices and profits beginning to slide in recent weeks, Fortescue chief Nev Power said he believed the December quarter would prove to be the worst of the price discounts.

 

"We expect that to be about the low point ... the market is moving around a little bit but we are seeing improved results as we go forward," he said.

 

"The market conditions we are seeing are as a result of significant intervention in the market from the Chinese government so it was always expected that with that intervention coming to an end in March we would see the market rebalance. Steel mills will typically always look at minimising their cost of production and that tilts the market back significantly in favour of high value in use ores like our own."

 

Having received 68 per cent of the benchmark iron ore price over the past six months, Fortescue believes it will receive between 70 per cent and 75 per cent of the benchmark iron ore price over the year to June 30, 2018.

 

Miners and analysts are divided over the degree to which the deeper discounts are cyclical; US miner Cliffs said in recent days it was likely to close its Australian iron ore division soon, largely because of the deeper discounts being applied to its product.

 

Shaw and Partners analyst Peter O'Connor believes the price discounts have been more cyclical than structural, but Citi analyst Clarke Wilkins has forecast little improvement for Fortescue over the next three years.

 

Mr Wilkins expects Fortescue to receive 70 per cent of the benchmark price over the next six months, meaning its fiscal 2018 average would be 69 per cent of the benchmark price.

 

He believes the company will achieve 70 per cent of the benchmark in fiscal 2019 and 72.5 per cent of the benchmark price in fiscal 2020.

 

Despite its belief in the cyclical nature of the price discounts, Fortescue will push ahead with plans to increase its average iron ore grade to above 60 per cent.

 

Fortescue's operations director Greg Lilleyman said the likely introduction of the Eliwana iron ore deposit over the next three or four years as a replacement for the Firetail mine would be a key part of that process, which was designed to allow Fortescue to capture even higher margins on each tonne of iron ore.

 

"Regardless of the spread between the higher and lower grade ores narrowing, or as we expect they will narrow, there will still be a higher price received for the higher grade ores than for the lower grade ores ... it is that differential we seek to chase on the back of the development of the Eliwana project in the future that will underpin the large part of that strategy," he said.

 

Fortescue will make a decision over whether to develop Eliwana within six months, and if approved the mine is expected to be developed by 2021.