Kumba jumps on soaring prices with launch of super high grade ore

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Themba Mkhwanazi, CEO, Kumba Iron Ore

KUMBA Iron Ore is considering production of limited quantities of a super high grade ore to capitalise on soaring prices being paid for higher grade material as Chinese steel manufacturers undertake a “flight to quality”.

According to Kumba CEO, Themba Mkhwanazi, this new marketing trend is “… here to stay” and was being driven by a number of environmental and technical developments in  China. These include tighter emission control standards being imposed along with a move to the consolidation of the Chinese steel industry and a shift to building larger blast furnaces which typically use higher-grade iron ore.

Kumba already produces the highest grade iron ore in the sector with the average iron content of its marketed ore reaching 64.5% in the first half of 2018. According to statistics provided by Kumba at a presentation of its interim results in Johannesburg on Tuesday the group’s four main peers sold ore with an average iron content ranging from 64.1% down to 57.7%. Kumba also sells a far greater proportion of its output in the form of higher grade  lumpy ore which commands a higher price than the standard fines product.

The higher grade of Kumba’s product resulted in a realised price of $69/ton FOB (free on board) for the group in the first half compared with prices achieved by its four main peers which ranged from $63/t to $36/t.

Mkhwanazi said Kumba was now looking at producing an ore containing 66% iron ore which would be marketed to those steel producers who buy their iron ore feedstock  in the form of high grade pellets. If plans went ahead, then the new high grade ore would be on the market within about two years. It would be produced through upgrading “… a small proportion” of Kumba’s current production in the treatment plants. He added sales volumes would be around two million tonnes (Mt) to three million tonnes annually.

Turning to logistics Mkhwanazi said he was “very concerned” about the recent spate of derailments on the railway line from Kumba’s operations at Sishen in the Northern Cape to the port of Saldanha Bay. These had forced Kumba to declare a temporary force majeure on some export shipments and resulted in 2.4Mt of “… lost sales opportunity” worth some R2bn in the six months to end-June.

In recent years, the incidence of derailments on the line had averaged about one a year, but since the last quarter of 2017 there had been six derailments resulting in the lost export sales. Mkhwanazi told Miningmx that a meeting was due to be held with Transnet at the end of the month at which he would be “… looking for more colour” on the cause of the derailments.

He said that Transnet had so far not provided the reasons for the higher incidence of derailments despite Kumba putting considerable pressure on Transnet to find out what was going on.

1 COMMENT

  1. Dear Fellow Readers,

    I have had an opportunity to listen in on the VALE 1HFY18 conference call. The following is an interesting exchange with the analysts :

    RBC analyst : Just on some changes in the iron ore market , we’ve seen big increase in the discounts on elements like Al & P. Pls describe the structural trends?
    VALE CEO :The trend has to do with 3x trends: Chinese production , which is low quality, went out of the market. Depletion of high quality production in Australia. That explains why our new product,,the flagship that we have, the Brazilian blend fines ( KIO main competitive product) , which next year will become our biggest volume of sales , is so successful. we are achieving premiums of $5-$7 over the IODEX62%…its a tremendous opportunity for Vale to differentiate itself in addition to the 65% Carajas premium lumps.

    Therefore , VALE will be making-up the volumes with this blend , thus another >50Mt supply. Yet the KIO chaps have the following key metrics :

    ______________ 1H14____1H15_____1H16______1H17______1H18
    Prod (Mt)_______ 22,8_____22,6_____17,8_______21,9_______22,4
    C1 ( $/t) ______ 55,6____ 45,4_____ 39,6_______ 44,9_______52,6
    SusCapEx ($/t)__ 25______ 23 _____7,6_________5,3________8,2
    Shipping ($/t)__ 47______ 29______ 28_________24_________23
    Price ( $/t) _____109_____76______ 56,5_______ 76,7_______ 74,8
    OCF ( $M) _____ 1207___ 695_____ 437________645________ 693

    And we know the following facts about Sishen & Kolomela :

    1. The stripping ratios are increasing & pit constraints have become worse
    2. The Diesel price (oil price ) is increasing leading to OpEx inflation
    3. The Fe grades are declining , with LoM = 10-12 yrs
    4. NOT doing stripping in CY16-CY17, has really complicated their future materially in that they are now lagging thus limiting the flexibility to deal with low Fe Ore price or high OpEx environments.

    So, its evident who Vale is going to knock-out and in short order. I just cannot believe that the KIO start chaps are not exploring marrying themselves to a steel-mill or company to secure their future given the “gathering clouds” in the near-term horizon. The shipping costs ( as per Baltic index) are pointing to near term increases despite the Trump trade bellicose sounds. Should they even approach anything close to 1H14 levels, then this operations will be dead. Fellow readers, Thats what happens to short-termism in mining…IT GETS PUNISHED HARSHLY!

    So the Vale crowd have noted where their product will be more competitive , plus they own their own ships & ports, in additions their running at $12/t with trackless operations ( low oil/diesel price exposure). KIO will leave ore behind in the Northern Cape!

    As for Minas Rio Mine, its in for a tough times. I think it will ultimately be sold to Vale.

    So the bumper dividend is actually Anglo extracting its Capital NOT a return on Capital!

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