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Fortescue bullish on iron ore prices

Fortescue Metals Group (ASX: FMG) chief Nev Power says he is more confident than ever in China’s demand for resources, which will continue to underpin iron ore prices.

Mr Power said he doesn’t see the purported amount of supply of iron ore coming online, suggesting it’s very easy to announce all these projects, but far more difficult to get them up and running and operational, including the required infrastructure such as railways, ports and power. In a similar vein, Atlas Iron Limited (ASX: AGO) boss Ken Brinsden noted yesterday that the investment community were too negative and had over-estimated the impact of sharp rises in iron ore supply would have on prices.

Interestingly, Fortescue is one of those companies that have announced plans to ramp up production of iron ore, including BHP Billiton (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Gina Rinehart’s Hancock Prospecting. Currently producing around 80 million tonnes annually, Fortescue expects to be producing 155 million tonnes annually by the end of this year.

Reporting its March quarterly production details, Fortescue announced that it had shipped 20.2 million tonnes of iron ore in the latest quarter, up 3% over the December quarter, and 60% higher than the previous year.

Many analysts believe iron ore prices will fall below US$100 a tonne in 2014, as a result of a massive increase in supply and falling Chinese demand. Fortescue disputes that view, suggesting that lower-cost production will drive out the high-cost producers, keeping the market in supply-demand balance.

Mr Power also suggested that China growing at just 7.7% instead of the 8% expected by economists, was no big deal, saying China is growing extremely well, and the company was selling every tonne it produces.

Foolish takeaway

News that Brazilian iron ore giant, Vale’s iron ore output fell 21% in the last quarter, compared to the December quarter as reserves of high quality ore falls in its oldest and most important mines, should support Mr Power’s view. Unfortunately for Fortescue, the market isn’t as confident, with shares down 4.4% at midday.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in BHP.

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