S&P affirmed FMG’s BB corporate credit rating, with a negative outlook, as well as the BB+ senior secured and B+ senior unsecured issue ratings.

Credit analyst May Zhong said S&P’s price deck assumed that iron ore price pressure would remain through to 2018.

"That said, our view that Fortescue will continue to generate a positive cash margin amid lower iron ore prices due to its ability to improve production costs and manage capital expenditure, will result in credit metrics in line with the 'BB' rating and our assessment of an aggressive financial risk profile,” she said.

Last week, FMG reported C1 costs for the December quarter of $US15.80 per tonne, including year-end costs of $15/t.

S&P expects FMG’s all-in break-even cost on a 62% iron basis to be around $35/t by the end of June.

“It is pleasing that S&P has recognised Fortescue’s ongoing commitment to sustainable cost reductions and operational efficiencies which continue to deliver strong financial results in these challenging market conditions,” FMG chief financial officer Stephen Pearce said.

S&P noted that FMG had less financial flexibility than its larger diversified peers like Rio and BHP.

"The negative outlook on Fortescue reflects the challenging market conditions facing iron ore players,” Zhong said.

“Slower demand growth from China's struggling steel industry and continued increase in low-cost seaborne iron ore supply are sustaining tough conditions.

“As such, Fortescue's credit metrics could fall below our current expectations if external pressures intensify.”

S&P expects iron ore to average $40/t this year and next. The Metal Bulletin 62% iron ore fines price hit $44.63/t overnight – its highest level this year – on weak volume ahead of the Chinese New Year holiday period.

Shares in FMG jumped more than 5% to $A1.705.