Iron Ore: Bolstered By Major Miners

BMI View: Major iron ore miners in Australia and Brazil look set to press ahead with a series of expansion plans despite the dull outlook in the global mining sector. While China's economic slowdown will be a drag on iron ore prices, these miners will continue to enjoy healthy profit margins due to low production costs. Aside from the traditional players, West Africa will gradually emerge as a centre of iron ore production over the coming years. We forecast global iron ore output to reach 2.5bnt by 2017, increasing at an annual average rate of 4.5%.

While miners across the board are feeling the heat of lower commodity prices and escalating cash costs, we believe the outlook in the global iron ore industry remains relatively sound. We forecast global iron ore output to reach 2.5bn tonnes (bnt) by 2017, increasing at an annual average rate of 4.5%. Encouragingly, the big three iron ore miners - BHP Billiton (BHP), Rio Tinto (Rio) and Vale -are pushing ahead with a series of expansion plans despite the economic slowdown in China. These miners, which provide around 70% of the seaborne trade, will continue to capture sizable profit margins with their crushingly low production costs in Australia and Brazil.

Australia Stands Above The Rest

Edging Higher Steadily
Global - Iron Ore Production

Iron Ore: Bolstered By Major Miners

BMI View: Major iron ore miners in Australia and Brazil look set to press ahead with a series of expansion plans despite the dull outlook in the global mining sector. While China's economic slowdown will be a drag on iron ore prices, these miners will continue to enjoy healthy profit margins due to low production costs. Aside from the traditional players, West Africa will gradually emerge as a centre of iron ore production over the coming years. We forecast global iron ore output to reach 2.5bnt by 2017, increasing at an annual average rate of 4.5%.

While miners across the board are feeling the heat of lower commodity prices and escalating cash costs, we believe the outlook in the global iron ore industry remains relatively sound. We forecast global iron ore output to reach 2.5bn tonnes (bnt) by 2017, increasing at an annual average rate of 4.5%. Encouragingly, the big three iron ore miners - BHP Billiton (BHP), Rio Tinto (Rio) and Vale -are pushing ahead with a series of expansion plans despite the economic slowdown in China. These miners, which provide around 70% of the seaborne trade, will continue to capture sizable profit margins with their crushingly low production costs in Australia and Brazil.

Edging Higher Steadily
Global - Iron Ore Production

Australia Stands Above The Rest

We expect Australia to drive the bulk of production increases over our forecast period. The economic slowdown in China will mean the end of several years of dizzying profits for mining companies. However, our forecast for iron ore prices to average US$105/tonne between 2013 and 2017 should kp operations of major miners profitable.

Boom Years Are Over
China Iron Ore Import Price, 62% Grade (US$/dry metric tonne, CFR)

The rich deposits of high-grade hematite ores in Australia (iron content of 62.5% and above), coupled with extensive infrastructure support will considerably lower the operational costs of mining projects (see 'Tracking The Cost Leaders In Iron Ore Production', January 17 2013) .

Hematite ores (also known as 'direct shipping ores') can be fed directly into iron-making blast furnaces and require relatively little beneficiation. Production from these deposits tends to place miners at the lower quartile of the cost curve. On average, the cost of producing iron ore in Australia is US$30-50/tonne, compared with US$40-50/tonne in West Africa and US$120/tonne in China.

Big Three Sitting Comfortably
Select Companies - Average Cash Costs Of Iron Ore (US$/tonne)

Brazil In Second Place

We believe Brazil will retain its status as the second-largest producer of iron ore over the coming years. Expansion projects at Vale's Carajás Serra Sul mine will be the primary driver of output growth ( see 'Iron Ore: Growth To Continue Despite Weakening Chinese Demand', July 09). Other major projects on the horizon include the Minas Rio mine of Anglo American as well as the Casa de Padre and Namisa mines by Companhia Siderúrgica Nacional (CSN).

Australia To Remain Prominent
Global - Incremental Iron Ore Mined Output & Growth

Unsurprisingly, Australian miners will continue to hold a cost advantage over their Brazilian counterparts due to their geographic proximity to China. Vessels from Australia take approximately 11 days to travel from Port Hedland to Qingdao (3,458 nautical miles) in China. This compares with 36 days from the Tubarao port in Brazil (11,023 nautical miles).

A bright spot, however, is China's pending decision to open up some of its ports to larger vessels. If approved, Vale's transport costs to China could be slashed by more than a third with the entry of its Valemax vessels into Chinese ports. The expansion of the Panama canal by mid-2015 could also result in faster, larger cargoes between Brazil and China over the medium term.

Australia A Winner In The Distance Race
Vessel Roundtrip Days To Qingdao, China

China On Weak Ground

We expect iron ore production in China to experience modest growth over the coming years. Apart from our downbeat view on the Chinese steel sector, the sharp fall in ore grade over the past decade has meant soaring production costs for domestic miners. According to China Customs General Administration, the average grade of marginal Chinese iron ore has fallen from approximately 43.1% in 2004, to 15% in 2012. As grades decline, many miners will have to adopt more complex and expensive processing methods, with energy becoming a larger overall constituent of the cost structure.

Cost To Escalate With Falling Grade
China - Iron Ore Grade, %

West Africa An Emerging Force

Aside from the traditional players, we expect West Africa to emerge as a centre of iron ore production. Given that little of the ramp up in output will be consumed domestically, the region will gain increasing dominance in the global seaborne market. Guinea and Sierra Leone will be the main drivers contributing an additional 62mnt of iron ore by 2017, from negligible levels at present.

With cash costs as low as US$40-50/tonne, West Africa is slated to become the new iron ore frontier. The region is home to rich reserves of high grade hematite ores with the potential to rival that of Australia's ore-rich Pilbara region. Over the long term, we expect countries such as Liberia, Republic of Congo and Gabon to receive greater interests from foreign investors as the governments undertake positive reforms to boost capital inflows into the mining space.

Work Still To Be Done
West Africa - Map of Major Railways, Ports & Mines

At The Forefront Of Consolidation

In our view, the iron ore sector could be at the forefront of consolidation in the global mining industry. With appetite for mine financing evaporating, an increasing number of smaller players will be pushed to the sidelines and be forced to put their projects on ice. With cash costs for new entrants estimated at around US$100/tonne, the iron ore sector will remain dominated by the big three and the penetration of new players into the industry will be mediocre in the coming years ( see 'Consolidation To Engulf Mining Industry', July 25).

Global - Select Iron Ore Projects
na = not available/applicable. Source: BMI
Country Company Mine Expected output Year
Australia Fortescue Metals Group Chichester Hub Increase from 55mntpa to 95mntpa 2013
Australia Fortescue Metals Group Solomon Hub (stage 1) 60mntpa 2013
Australia BHP Billiton Total company capacity Increase from 187 to 207mntpa 2014
Brazil Companhia Siderúrgica Nacional Namisa Increase from 14.5 to 39mntpa 2014
Brazil Vale Apolo 24mntpa 2014
Brazil Anglo American Minas Rio 26.5mntpa H2 2014
Guinea Bellzone Mining Forécariah 1mntpa 2013
Guinea Bellzone Mining Kalia 10mntpa 2014
Guinea Rio Tinto Simandou 95mntpa 2018
Guinea Vale Simandou North 15mntpa Frozen
Sierrra Leone African Minerals & Shandong Iron Tonkolili 40mntpa 2014
Sierrra Leone London Mining Marampa 16mntpa 2015
Sierrra Leone Argosy Minerals Bembeye 2.2bnt reserves na

Risks To Outlook

The risks to our outlook are weighted to the downside. A sharper than expected slowdown in the Chinese economy will adversely affect demand for iron ore, and by extension, prices. Subsequently, this would challenge the economics of mining projects and deter new supply from coming online. Furthermore, the waning attractiveness of frontier mining could put more infrastructure projects on the backburner. This could result in further delays to the anticipated mining boom in West Africa.

Global - Iron Ore Production Forecast
f = BMI forecast. Source: BMI, WBMS
2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Global, mnt 1,629 1,908 1,980 2,040 2,146 2,245 2,355 2,457 2,543
% Chg y-o-y -5.4 17.1 3.8 3.0 5.2 4.6 4.9 4.3 3.5
Australia, mnt 394 433 477 520 586 634 679 708 729
% Chg y-o-y 15.06 9.97 10.09 9.01 12.6 8.3 7.1 4.2 3
Brazil, mnt 291 372 460 391 408 426 448 470 484
% Chg y-o-y -17.1 28.0 23.7 -15.0 4.2 4.5 5.1 5.0 2.5
China, mnt 366 335 506 427 440 451 463 475 487
% Chg y-o-y -12.6 -8.6 51.3 -15.6 3.0 2.5 2.6 2.8 2.5
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