(Adds background, cash production costs forecast)
Jan 30 (Reuters) - Australia's Fortescue Metals Group Ltd on Tuesday reported a 4 percent decline in second-quarter iron ore shipments, in line with analyst estimates, and warned its iron ore was selling at a greater discount than expected.
The world's fourth-largest producer of iron ore said shipments fell to 40.5 million tonnes in the three months ended Dec. 31 versus 42.2 million tonnes in the same period a year ago. UBS had forecast a figure of about 40.5 million tonnes.
Fortescue, which sells lower grade iron ore, has suffered as top market China has switched to higher grade, less polluting, iron ore as it tries to combat severe winter smog. The discount to which Fortescue sells its product against the benchmark 62 percent grade index has been steadily worsening, hitting 23 percent in the first quarter. It said on Tuesday that the discount would rise to 34 percent in the second quarter of fiscal 2018.
The company warned in October the discount was likely to be between 25 and 30 percent in the 2018 financial year. Cash production costs averaged $12.08 per wet metric tonne over the quarter, 3.7 percent less than the year-ago period. The company maintained its cost target forecast for this year of between $11 and $12 a tonne.
The Australian government earlier this month said it expected a 20 percent drop in iron ore prices this year, hurt by rising global supply and cooling demand from China. However, most private forecasts expect the price to remain largely flat.
(Reporting by Aditya Soni in Bengaluru; Editing by Chris Reese and Rosalba O'Brien)
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