* Iron ore shipments fall to 38.7 mln T in Q3, down 2 pct
* Costs rise due to stronger Australia dollar, fuel prices
* Miner sees revival in low grade ore demand as steel margins drop
* Receives 62 pct of Platts 62 CFR; keeps FY guidance of 65 pct (Adds analyst comment in paragraph 4)
MELBOURNE April 24 (Reuters) - Iron ore producer Fortescue Metals on Tuesday reported a 2 percent fall in its fiscal third-quarter iron ore shipments on reduced demand in China, while also flagging an increase in costs, disappointing analyst expectations.
Fortescue said it shipped 38.7 million tonnes in the March quarter compared with 39.6 million tonnes a year ago due to lower demand in what is seasonally the weakest quarter for supply because of weather disruptions. The miner maintained its fiscal 2018 shipment guidance at 170 million tonnes.
The world fourth-largest iron ore miner said its cash production costs rose 1 percent in the quarter mostly due to a stronger Australian dollar and higher fuel prices.
“The bottom line is that we view this as a modestly disappointing operational update,” said broker Clarksons Platou in a report.
“We currently have a Neutral rating and A$5.00 price target for Fortescue. We would expect (estimates) to move a bit lower on the higher FY18 cost guidance flowing through,” it said.
Shares in Fortescue fell 4 percent on Tuesday to A$4.50 ($3.42), in line with an overall drop in the mining sector.
Fortescue also noted that the discount for its lower quality ore had widened. It said it received 62 percent of the average benchmark Platts 62 CFR index for its ore during the quarter, down from 68 percent in the first half of fiscal 2018.
However, an expected seasonal increase in demand should support steel markets for the rest of the current quarter, Fortescue said, and it held its full-year price realisation guidance steady at 65 percent.
“Profit margins for China’s steel mills have declined from the peaks reached in the December 2017 quarter and there are now signs that steel mills are refocusing on costs, resulting in increased demand for Fortescue’s ... lower iron content ores,” it said.
The company also raised its expected full-year production cost target.
Prices for Fortescue’s ore fell over the quarter as China switched to higher-grade, less-polluting iron ore to reduce smog this past winter. That boosted demand for premium ores, much of which comes from Brazil.
Fortescue cut its iron ore price forecast for the full fiscal year in March, citing subdued construction activity in China, some ongoing steel production restrictions and global trade worries.
Its first-half 2018 profit - over the six months ended on Dec. 31, 2017 - fell 44 percent due to weak prices for its lower quality iron ore.
Fortescue said its cash production costs rose 1 percent to an average $13.14 per wet metric tonne in the March quarter. The miner raised its full-year cost target to $12-$12.50 per wet metric tonne, from $11-$12 per wet metric tonne.
$1 = 1.3153 Australian dollars Reporting by Melanie Burton in MELBOURNE and Susan Mathew in BENGALURU; Editing by Richard Pullin and Tom Hogue