By Steve Fiscor, Editor-in-Chief
This month, E&MJ publishes the 2014 Iron Ore Report. Iron ore production is one of the most important aspects of the mining business. Readers might recall January 2014’s Project Survey, which pegged iron ore project investment at $261 billion or one-third of the total mining project investment of $791 billion. The level of growth in this area has slowed more recently, but it’s still a major aspect of the mining business.
Iron ore is a bulk commodity, which means that miners make money on volume. It also means that iron ore miners are committed; there are no swing suppliers. Iron operations are massive operations that take years to build. The average iron ore project today represents an investment of $1.2 billion compared to $300 million for the average gold mine.
The seaborne iron ore trade is fiercely competitive. On a regional basis, Brazilian iron ore miners are competing against miners in Western Australian (WA) for the Chinese business. Together the Big 3—Vale (Brazil), BHP Billiton (WA) and Rio Tinto (WA)—control 38% of the market. As the expansion plans that all three put in place during a period of much higher prices come to fruition, prices for iron ore in the seaborne market (CFR north China) have plummeted from $159/metric ton (mt) in February 2013 to $76.25/mt as this edition goes to press.
Miners, traders and stockholders have criticized the Big 3 for oversupplying the market and driving benchmark prices lower. Both of the Australian miners defend their expansion plans, saying that productivity improvements will allow them to deliver more iron ore to China and earn a profit. For years, E&MJ has carried news about autonomous mining operations in the Pilbara and the massive scale-up of rail infrastructure and port facilities. Similar to their Australian counterparts, Vale is also bringing on additional low-cost capacity. They say the S11D complex was designed specifically to compete in this low-priced environment.
If everything remains the same, a sluggish global economy and slower-than-expected growth in China, this dangerous game of chicken could end as it usually does, tragically. Already analysts are saying they expect to see more than 120 million mt of high-cost iron ore exit the market. Readers will note some of the fallout in Leading Developments. In addition to two stories documenting BHP’s expansion plans and Anglo American bringing the new Minas-Rio iron ore mine in Brazil into production, another short story discusses Cliffs Natural Resources taking an impairment charge attributed to Asian-Pacific and Canadian iron ore segments. The good news is that Cliffs is fairly insulated from the seaborne iron ore market. More than one-half of its production is sold to U.S. steel makers on long-term contracts. There are several other iron ore producers with similar regional relationships. It’s those iron ore miners banking on the Chinese steel industry who will be hurt the most.
There are two sides to every coin and the market could turn. Recent political leadership changes in the U.S., India, and Brazil, will influence the economy and steel markets. The recent decline in petroleum prices brought about by similar tactics from oil producers in the Middle East could spur additional economic growth. It’s unlikely that the market would turn as quickly as it softened, which would put the iron ore upswing closer to the end of 2016. Until then, keep an eye on iron ore, it’s going to get even more interesting. Enjoy this edition of E&MJ.
Steve Fiscor, E&MJ Editor-in-Chief