OPINION: Andrew Forrest’s costly green hydrogen adventures are compounded by the apparent arrival of a long-forecast iron ore correction.
Hydrogen might not be the only problem confronting Andrew Forrest and Fortescue, the company he founded 21 years ago just in time to catch a boom in Chinese demand for steel.
Iron ore is also facing a squeeze as China’s appetite for steel fades and new mines start producing, including Guinea’s big Simandou development and the Onslow project of Mineral Resources.
To use a boxing analogy, something Mr Forrest understands because of his interest in the sport, Fortescue has been lined up for a one-two: a quick jab with the one hand followed by a power punch with the other.
In Fortescue’s case, the jab is hydrogen, a black hole that has sucked in an estimated $2 billion of the company’s capital with nothing to show for it.
The power punch is a start of a weakening cycle in the price of iron ore, which will eat into Fortescue’s profits, making it harder for Mr Forrest to fund investment in hydrogen or the other interests he has amassed in his private business, Tattarang.
Those other interests can be seen as part of Mr Forrest’s problem, one that often catches out self-made rich people who believe their magic touch can turn anything into a success. Included here are investments in clothing via the RM Williams brand of boots and outback gear, meat with Harvey Beef, property development and hospitality, to mention a few.
Another problem is the management structure that has evolved at Fortescue after Mr Forrest’s attempt to distance himself from day-to-day decision making.
He is now very much back in charge of the business he created, with a middle management decimated by departures of people unsure about whether Fortescue is an iron ore miner or a hydrogen developer.
If any good can come from the embarrassing dumping of hydrogen it is that everyone now knows Fortescue is an iron ore miner that temporarily lost its way.
The return to basics, which is essentially the process Mr Forrest has started, comes just in time because the long-forecast iron ore correction, which never seems to arrive, appears to have started.
ANZ Bank is the latest to warn that iron ore is becoming oversupplied just as Chinese demand declines.
It estimates stockpiles of ore at Chinese ports have swollen by 35 million tonnes since late last year, a 42 per cent increase thanks to shipments arriving from Australia and Brazil, with Africa to come.
Ore quality is also an issue, which is one of the reasons behind the closure two months ago of the Yilgarn (Koolyanobbing) mine of Mineral Resources and a switch to exports from Onslow.
Fortescue, also a producer of low-grade ore, has invested in a high-grade iron ore business at Iron Bridge. But teething troubles persist, most of which occurred while Mr Forrest was fully focused on his hydrogen plans.
Having lost confidence in Fortescue earlier this year (largely because of the hydrogen adventure), Macquarie Bank warned the most recent changes at the company, which includes a realigned core focus on iron ore, was timely “ahead of a deteriorating iron ore price environment”.
The shift back to basics was enough for Macquarie to lift its price target on Fortescue from $12.50 to $14.50 (it was $18.50 in February), while maintaining a ‘sell’ recommendation on the stock.
There are two other aspects to the Fortescue situation, one dealing with the past and the other with the future.
The past is to compare the hydrogen flop with what happened to Mr Forrest at Anaconda Nickel about 25 years ago, when a failed attempt to build a technically complex, high-pressure acid-leach project at the Murrin Murrin mine led to Swiss mining giant Glencore’s purchase of the business.
This time around it has been an attempt to build a technically complex hydrogen project using only renewable energy, which has failed.
The difference is that Glencore, or any other company, is unlikely to pick up the pieces, though it is possible the federal government might be invited to the hydrogen party.
Despite having invested $2 billion for no return, Mr Forrest remains a true believer in hydrogen, but only if produced using renewable energy and not by other means such as natural gas.
Hopefully the government will not commit funds to hydrogen, either through direct exposure or some form of tax incentive.
