World Mining Exploration News

Ferrexpo hit by faltering demand for iron ore

Ferrexpo, the Ukrainian iron ore producer, was yesterday forced to scrap expansion plans as the global slowdown continued to inflict damage on the emerging economies of eastern and central Europe.

The London-listed company said its export customers, mainly large steel producers, had deferred orders in the last two weeks. The delaying of orders into 2009 would cause “materiallyreduced demand” for Ferrexpo’s iron ore pellets, reducing 2008 sales by5-10 per cent from forecast levels.

Ferrexpo said it would focus on its existing Ukraine operations, freeze capital spending plans and run the business for cash. The chief executive, Mike Oppenheimer, and Dennis McShane, the business development director, quit, with Mr Oppenheimer making way for Kostyantin Zhevago, the founder and majority owner. Mr Oppenheimer, who earned $892,500 (£544,000) last year, and Mr McShane, who was paid £236,250, will get a year’s salary and keep their shares and long-term incentive payments on leaving. Simon Wandke, the company’s chief marketing officer, said: “The deterioration in the demand outlook has been marked and is exacerbated by customer destocking of iron ore in the group’s core market regions… We will focus on cash conservation and continue to prioritise the production of higher-quality pellets, for which the demand is more robust.”

The Swiss-based company’s shares fell 25 per cent to 39.5p, the lowest since the company’s initial public offering in June 2007, valuing Ferrexpo at £232m.

Ferrexpo produces more than 9 million ton a year of iron ore pellets for use in steel production, 85 per cent of which is exported to steel makers around the world. The company reported a softening of demand in a trading statement two weeks ago, but has been hit by a sudden drop-off in production anddemand for steel since then.

Previously fast-growing central and eastern European economies have suffered from a sharp reduction in demand for the commodities that are their key exports, as the world economy has slowed. Ferrexpo’s troubles are further bad news for Ukraine, which has already had to seek emergency loans from the International Monetary Fund.

Commodity prices soared as long as a booming world economy increased demand for raw materials, but now, with the threat of recession spreading, commodity prices are heading for their sharpest annual fall since at least 1957.

Ferrexpo’s Gorishne-Plavninskoye mine in Poltava is the fourth-biggest iron ore asset in the world. The company had been seeking a bigger partner to take a 50 per cent stake, with the aim of quadrupling production over eight years, but has now put those plans on hold.

Ferrexpo raised £213m in last year’s flotation as Mr Zhevago, a Ukrainian, sought funds to expand productionand tap into booming demand forcommodities. He sold 21 per cent of the company earlier this month to RPG Industries at 83p a share. RPG, the parent of New World Resources (NWR), which owns 25 per cent of Ferrexpo, has installed Miklos Salamon, NWR’s chairman, and Marek Jelinek, its finance director, as non-executivedirectors of Ferrexpo.

Michael Abrahams, Ferrexpo’s chairman, said: “Ferrexpo is a resilient business with enormous iron ore resources and an established track record of increasing production and managing costs.”