the cost of freighting iron ore to china , page-2

I guess this has occured to someone else as well.

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FMG to reset shipping contracts

Kate Haycock
Friday, 5 December 2008

THE collapse in freight rates has driven Fortescue Metals Group to suspend its long-term shipping contracts in favour of a free-on-board regime.

FMG, which only began mining at its Pilbara operations this year, was paying dearly for some of its shipping arrangements to certain Chinese steel mills.

The iron ore miner was selling around two-thirds of its product into China on contracted negotiated freight (CNF) or cost and freight (CFR) terms.

Under this system, FMG was responsible for supplying the ore on a landed basis into China – which included costs.

When shipping rates were up around $US50 per tonne earlier this year, the company was making money on its shipping book, but with the collapse of freight rates down to nearer $5/t wearing the freight costs locked in at the time have bitten into the miner’s bottom line.

It is not clear how much it may have cost the miner, although media reports earlier this year suggested it could be in excess of $A100 million.

To counteract the impact on its costs, FMG said today it contacted the shipping companies that handle its freight to suspend its contracts of affreightment and consecutive voyage contracts.

The miner now expects two-thirds of its sales to be shipped free-on-board – meaning the mills arrange and pay for their own freight.

While a third of FMG’s sales would still be shipped CFR, the rates on these ships will also be renegotiated to reflect current market shipping prices.

An FMG spokesperson told MiningNews.net it was not clear if there would be any financial penalties for pulling out of the contracts with the shipping companies.

The decision would be welcomed by Chinese mills, the spokesperson added, who would also benefit from reduced shipping costs.

Suspending the contracts will have no impact on FMG’s marketing or its sales volumes, the company said in a statement today.

Shares in FMG dropped as low as $2.17 this morning from yesterday’s close of $2.46, an 11% fall, before recovering slightly to $2.29.