Fortescure metal group ltd Essay

4659 Words Apr 13th, 2014 19 Pages
Executive summary
The research group has undertaken an analysis of Fortescue Metal Group Limited (‘FMG’). The analysis consists of two parts. Part 1 includes a macro economic analysis which reviews FMG’s economic environment and how this impacted on its performance during the years ended 30 June
2008 to 30 June 2012. During this period FMG’s performance was primarily driven by an overall increase in the price of iron ore, underpinned by higher levels of demand for this product from
China. It is considered that continued demand for iron ore by Chinese steel producers and continued growth in China’s gross domestic product (‘GDP’) is likely to support the forecast iron ore price of USD120 per metric tonne (‘mt’) and result in future
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Assuming a constant quantity of ore is shipped in the future, at the forecast price of USD120 FMG would increase its revenue by USD219m, meaning FMG would earn additional revenue of USD56.2m for every USD1 increase in the price of iron ore.

(b) China – GDP and steel production – In 2012 China was the world’s largest producer and second largest consumer of steel.10 From 2008 to 2012 the revenue earned by Chinese steel producers has grown at an annualised rate of 17.5%, and is forecast to increase at an annualised rate of 8.0% over the next five years (see Chart 3 – ‘Chinese Steel Industry Revenue’).11 This strong growth suggests continued demand for iron ore (the primary input in steel production). China’s GDP can be used as an indicator of its likely demand for steel, and between 2003 to 2012 GDP increased from
USD1,640bn to USD8,230bn (see Chart 4 – ‘China GDP’). China’s GDP has been forecast to grow at ‘an average of 8.1% between 2013 and 2016’.12 China’s domestic demand for steel is underpinned in part by continued government investment in infrastructure and real estate.13 In the first four months of 2012 the Chinese government spent 700bn yuan on infrastructure projects,14 and in July 2013 Chinese customs reported iron ore imports of 73.1m mt, a monthly record, which was said to be connected to demand driven by government authorised projects.15 There is a risk

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