In an effort to save costs in wake of the massive plunge in iron ore prices in recent months, Fortescue Metals Group Limited (ASX: FMG) has announced roster changes in the Pilbara which could see a large number of workers lose their jobs.
Fortescue said that it would move its workforce from a roster of eight days on and six days off, to two weeks on and one week off – a system commonly referred to as "two and one" – as of the end of June. While some estimates suggest that more than 700 jobs could be lost as a result, it's likely that the changes will also require those workers who keep their jobs to work more days every year for the same amount of pay (given that most are on salaries).
Citing the "ongoing instability in the iron ore market", Fortescue's CEO Nev Power said that the move would "bolster our resilience in an uncertain and volatile market", allowing it to cut costs even further.
The move is the latest indication that Fortescue Metals Group is struggling in this low price environment. The miner recently failed twice to raise capital in the US debt market (likely due to the high level of perceived risk for investors) while its desperation was also highlighted when its founder and Chairman, Andrew "Twiggy" Forrest, called for an industry-wide cap on production to bolster prices.
The decision follows a horror run for the iron ore industry whereby prices have fallen 18% since early March and 30% since the beginning of the year, based on data from the Metal Bulletin. Fortescue has, on several occasions, pointed the finger at its larger rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) for flooding the market with unneeded supplies at a time where demand is waning rapidly.
What this means for you
Fortescue's latest round of job cuts will no doubt come as terrible news for many families around Australia, but it seems to be a necessary decision. In light of the recent plunge in iron ore prices, it is critical that Fortescue reduces its expenses to allow it to remain profitable, and to ensure it can service its enormous debt load.
While it could certainly help Fortescue; investors should continue to steer well clear. Iron ore has managed to regain some of its value over the last few days but some estimates suggest it will fall well below US$40 a tonne before the end of the year. Should that happen, it is highly unlikely that Fortescue will be turning a profit.
Although it remain near a multi-year low, Fortescue's shares managed to edge slightly higher on Tuesday to be trading at $1.835.
