Fever for iron ore intensifies

[miningmx.com] — EXXARO’S play for African Iron comes as large investments are made globally, particularly in Australia, to develop iron ore and coal mines.

Exxaro announced an offer last week to buy African Iron, located in the Republic of Congo, at a 49% premium.

But while the relatively young South African group has been putting finishing touches to the takeover bid, the price of iron ore on global markets has fallen from a record $175/tonne last year to $131.50/tonne. Last week iron ore was trading around $145/tonne.

It’s no wonder, if one looks at events in Australia.

The Aussies, world leaders in iron-ore production with about 40% of the global market, want to increase production by almost 60% over the next 10 years and at the same time double the global coal trade. To this end, the country has said it will spend $115bn on infrastructure over the next 10 years.

Newswire Bloomberg has calculated that by 2022 Australia will have a freight-shipping capacity of 1.5bn tonnes, and will build 3,700km of new rail lines.

In the Pilbara region in Western Australia, BHP Billiton and Rio Tinto mined some 500 million tonnes (Mt) of iron ore last year. That’s 40% of the global market.

Over the next five years these two giants want to increase production from Pilbara by 538 Mt a year – more than double the current production.

Port Hedland, the biggest port from which BHP Billiton exports, will increase its handling capacity from the current 199 Mt, to 390 Mt a year by 2016. This creates the danger of a massive wave of iron ore production hitting the globe in the next five years, which would put pressure on prices.

The growth in Australia’s coal exports is equally dramatic. Abbot Point, a small coal port beside the Great Barrier Reef lagoon, is currently exporting 15 Mt of coal a year.

Queensland’s government now wants to enlarge this port to a carrying capacity of 385 Mt a year. Richards Bay, one of the two largest coal ports in the world, currently exports around 65 Mt a year and has a handling capacity or 91 Mt.

China is the driving force behind the demand for iron ore, producing the equivalent of around 350 Mt a year in its domestic iron-ore mines.

This ore is of such a poor quality that it probably takes closer to 700 Mt to deliver the same iron content as imported iron ore, says an analyst from Macquarie Capital.

It’s extremely expensive to produce steel from such poor quality iron ore, but China’s huge demand for steel means that its steel factories have no choice but to buy and use this ore.

“Until China’s domestic production is replaced by imported iron ore, we do not expect the price to fall dramatically,’ said the analyst.

At the earliest this will take place in five or six years. “Until then the price could fluctuate somewhat between the current levels of $135 and $175/tonne.

“Even when all the poor quality Chinese ore has been replaced, at its lowest the price will fall to $80/tonne,’ he said.

– Sake24