Ferrexpo's (LON: FXPO) share price has historically marched in lockstep with iron ore prices. But this correlation is unsurprising, as the Swiss-based company is the third-largest exporter of iron ore pellets in the world.

Ferrexpo shares were worth 481p at the end of July 2021 as the iron ore price hovered at a near-record of $225/tonne. But the metal fell to $85/tonne by 11 November, while its share price fell below 300p. China, which accounts for over 75% of global iron imports, had unnerved investors with pollution-linked steel production curbs and the potential collapse of construction giant Evergrande.

And despite iron ore’s price recovery to $145/tonne, Russia’s invasion of Ukraine has seen Ferrexpo shares nosedive 70% to 145p.

Ferrexpo share price: Russian invasion

Ferrexpo owns three iron ore mines and an iron pellet facility in central Ukraine, close to Horishni Plavni. The miner produces around 12 million tonnes of iron ore pellets every year; half are transported to customers by rail, with the rest via the seaport of Pivdennyi.

However, the Ukrainian railway network is only providing ‘limited capacity to its freight customers,’ allowing the company to send just ‘a proportion of its production to the western border of Ukraine to customers in Europe.’ And as near-term railway capacity ‘remains unclear,’ Ferrexpo is uncertain how many pellets it can continue to deliver to Europe.

Worse still, the miner has notified investors that export activities at Pivdennyi have been ‘temporarily suspended,’ presumably due to Russian troop movement towards Odesa. The port closure has forced Ferrexpo to issue ‘force majeure notices to certain customers that were due to receive the Group’s products via oceangoing vessel in the near term.’ This legal provision should allow the company to break its contracts without penalty, due to the extreme circumstances beyond its control.

The company is now stockpiling iron ore pellets at its production facility until export logistics are back up. But as its ‘primary focus remains the safety of its workforce in Ukraine,’ production could stop at any time. And worryingly, the company has delayed its full-year audited results indefinitely in the wake of the invasion.

High risk, high reward

In Q4 results, Ferrexpo reported full-year production of iron ore pellets of 11.2 million tonnes in 2021, ‘a result in line year on year, which includes disruptions during the year for pelletiser upgrade work.’ Quarter-over-quarter, production rose 18% to 3.1 million tonnes due to this completed upgrade. And now, every Ferrexpo pellet is now comprised of desirable high-grade forms of iron ore, graded 65% Fe or above.

In January, CEO Jim North told investors Ferrexpo was ‘in a strong position to grow our production base in the year ahead, both in terms of production volumes and product grades, with a positive outlook ahead for premium grade iron ore pellets.’

But Ukraine is now an active war zone. And as Russian forces invade from Crimea, they will come across a large stockpile of high-grade iron ore pellets, which they will be sorely tempted to appropriate. But Liberum analyst Ben Davis believes ‘for that to happen, you have to think that Moscow is willing to bear whatever sanctions that come its way if it starts confiscating assets from western investors.’

Of course, both Switzerland and the UK have already contributed to the current crippling sanctions on Russia. And fearing nuclear escalation, NATO has repeatedly refused to put boots on the ground. With its economy collapsing, Russia may not have much to lose by the time its army arrives in central Ukraine.

As ever, there are complicating factors. Davis calculates that Ferrexpo’s net cash of $117 million means it can survive a ‘very long time’ without selling any iron. And Ukrainian President Zelensky has asked for in-person peace talks with Putin. If an off-ramp is taken, Ferrexpo would find itself in the middle of a war-torn country, with European funds to rebuild and millions of tonnes of iron ore to sell.

And according to Huatai Futures analysts, Russia accounts for 10% of the global steel trade. Escalating sanctions could see future exports cut off, and they believe ‘only China can fill this huge market vacancy.’

But European iron buyers will need to consider that the cost of shipping a 40-foot container from China to Northern Europe has risen from $2,100 in October 2020 to $14,200 today. And changing defence norms may see European nations pay a premium to keep Ferrexpo’s Ukrainian iron at hand.

If hostilities end in an uneasy peace, the Ferrexpo share price could soar. But its assets remain in an active war zone. If Russia’s President remains hell-bent on drawing a new iron curtain over Europe, Ferrexpo shares could also collapse.

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