JPM-AUSTRALIA FIRST TO MARKET Top Stories-20251108

Deep dive: BHP, RIO, FMG are lowering iron ore product specs; margin benefit and delayed hub replacement positive, but does it suggest structurally lower pricing differentials?

The major iron ore producers have all changed their product specifications to optimize value. At the Aussie miners, grades are lower, but the move facilitates higher margins over the long term through lower costs. Key takeaways: 1) Fortescue’s new life of mine plan unveiled last month sees the introduction of a lower-grade (55% Fe) product, with lower revenue more than offset by lower strip ratios (less waste movement), for a margin uplift. 2) Rio Tinto is folding the majority of its 59% Fe SP10 product into its flagship Pilbara Blend, lowering its Fe content from 61.6% to 60.8%, which should help delay major project capex to replace depletion as well as benefitting unit costs; 3) BHP has shifted its product spec lower in 2024 and 2025, which should help support cost-out to achieve its aggressive mid-term (~FY30) cost target of $17.5/t (vs FY25 at $19/t), albeit we sit higher than guidance; and 4) Vale has targeted silica reduction to eliminate impurity discounts and achieve better revenue outcomes across 150Mt of sales. These changes are captured in our Deep Dive review into the Pilbara mine plans for BHP/RIO. From Jan ’26, the Platts iron ore index will reduce its specification from 62% Fe to 61% Fe. Lower-grade iron ore offerings have been supported by Chinese steel mills looking to reduce input costs. This is visible in reduced discounts for lower-grade products,benefiting FMG more than BHP/RIO/Vale. We believe this could be a structural change given our forecasts for an ongoing decline in Chinese steel output (keeping pressure on steel prices). However, based on current valuations, our pecking order in Australia is BHP (OW)/RIO (OW)/FMG (N).