As the discount between the high and low grades went from 5 per cent in late 2016 to as much as 35 per cent around this time last year, commentators including Chanticleer questioned whether FMG had misread the market. But Gaines and her team kept the faith.

Gains and her chief operating officer, Greg Lilleyman, are far too experienced to gloat, but FMG’s December quarter numbers, released on Thursday, allowed them just a hint of “I told you so”.

The discount at the end of December was around 33 per cent, based on FMG’s numbers. And the trend has accelerated in January, with veteran analyst Peter O’Connor of Shaw & Partners now estimating the discount had narrowed such that it is now closer to 20 per cent than 30 per cent.

FMG’s share price has risen 35 per cent since the start of the year, and is up a staggering 60 per cent since its most recent low in September 2018. That’s added $2.3 billion to Forrest’s stake in FMG, which is worth $6.1 billion.

Andrew Forrest’s fortune has jumped in recent months.  David Rowe

Lilleyman, who recently visited China to talk to customers, says the anecdotal evidence that the shift is now cyclical is strong.

“Without exception they all talked about declining steel profitability … therefore they have a greater focus on input costs over productivity.”

Lilleyman and Gaines were quick to say that steel-maker profitability isn’t falling because demand for steel is falling off a cliff in a weakening Chinese economy.

Gaines points out China’s steel production climbed by 100 million tonnes in 2018 – the size of Japan’s entire steel-making industry – and China’s recent announcement of 10 rail projects and four new airports are further proof infrastructure continues apace.

“I don’t think it’s the length of the cycle that really matters,” Elizabeth Gaines told Chanticleer. “Whether that’s for one week or one month, that doesn’t really matter. This demonstrates that it is cyclical.”

 Sanghee Liu

Rather, the steel makers’ margins are falling back from supercharged levels seen across big chunks of 2017 and 2018, to more normal levels.

Lilleyman also says the impact of China’s anti-pollution push appears to have largely washed through the system, with steel makers upgrading their operations to be generally cleaner, whatever quality of iron ore they use.

Not everyone convinced

There has been a shift in recent months towards lump iron ore and iron ore pellets, rather than iron ore fines, and FMG has responded to this by increasing lump sales.

Still, not everyone is convinced that the pricing structure is cyclical; RBC analyst Paul Hissey said he wants to see the discount narrow over a longer period and pointed out FMG had a guidance discount range of 10 per cent to 15 per cent only 18 months ago.

But Gaines is more definitive.

“I don’t think it’s the length of the cycle that really matters,” she told Chanticleer. “Whether that’s for one week or one month, that doesn’t really matter. This demonstrates that it is cyclical.”

Of course, Gaines is now better placed than ever to deal with whatever product and quality trends the market throws up, with Fortescue starting shipments of its new West Pilbara Fines product during the quarter.

The product, which has apparently been well received by steel makers in their test runs, is higher quality relative to the main FMG product suite. The miner expects to ship up to 10 million tonnes in the 2019 financial year.

Full-year cash costs will be around $US13 a tonne. Costs fell 1 per cent on the September quarter, but were up 8 per cent on the previous year, due to lost productivity from a bushfire caused by lighting strikes at the company’s Solomon Hub in mid-December.

Gaines says FMG can keep pushing cash costs down. Removing expenses isn’t the key, but improving productivity and efficiency – for example through the increased use of automation – will be key.

Fifteen years into its life, FMG has become exactly what it should be – a well-run, relatively mature miner that has developed the agility to deal with whatever the iron ore market throws up.

Sometimes the winds will blow against it, like that shift towards higher quality ore of recent times. And sometimes market forces will help, like the tragedy at Vale’s Brazilian mine, which Gaines declined to comment on beyond offering thoughts and prayers for those affected.

Low costs, an improved product mix and a strong balance sheet mean FMG is better placed than ever to deal with changes both structural and cyclical.

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