Growing steel demand is good news for iron ore

India is the biggest question mark in most iron ore supply forecasts. Earlier this year the export ban in place since July 2010 in the state of Karnataka to prevent illegal mining was lifted. This had been a key reason why India’s exports fell by 8% to 89mt in 2010. But although the ban will increase supply, a nationwide 20% export duty on iron ore export sales could dampen the impact. Whether supplies from India will be attractive to Chinese buyers with the additional tax burden remained to be seen as DCI went to press.

 

At 626.7mt (million tonnes), China in 2010 had a share of 44.3% of the world crude steel production, writes Kunal Bose. In the first four months of this year, China alone accounted for nearly 230mt of world steel output of close to 500mt. The world has watched in wonder as China became the principal driver of global demand for minerals and metals. In 2010, China alone constituted as much as 59% of global seaborne trade in iron ore, the principal raw material for making steel through the basic oxygen furnace (BOF) route. It is no wonder then that Chinese moves like rebuilding and drawing down of inventories leave an impact on the iron ore market. Leading iron ore producers all the time are trying to figure out to what extent China in the long run will be seeking self-reliance in iron ore, the biggest dry bulk commodity in the minerals space.
There is no love lost between China and the principal producer exporters of iron ore. To start with, Beijing was
resentful that instead of China, the world’s biggest consumer of the mineral, it would be Japan to negotiate the annual prices of iron ore with the Brazilian miner Vale and Anglo-Australian groups BHP Billiton and Rio Tinto. While the triumvirate took notice of that more recently, what left China infuriated was last year’s decision by major suppliers of iron ore to what appeared to be arbitrary dispensing with the decades old annual pricing system for quarterly price contracts. Besides China, the world’s largest steel producing group ArcelorMittal and many others thought the new price regime would result in their iron ore bill going up. That has come true.
Miners are now making further migration to monthly contracts which, according to them, will more faithfully reflect the spot prices. The monthly contract prices are primarily based on indexes made available by agencies like Platts, Metal Bulletin, CRU and Steel Index. That the miners are in a position to dictate terms is a fact of life. For however more aggressive China may become to build iron ore mining capacity within the country and acquire mining rights independently or through joint ventures or through minority participation in foreign countries, it will not be able to do without imports at any point in future. What China is aiming at is to bring down the share of imports in the growing total use of the mineral.
A BHP Billiton paper says the world steel production from a base of 1.414bn tonnes in 2010 should be growing at a CAGR of 3.7% to 2.446bn tonnes in 2025 and during this period China will have an incremental production of 485mt. A report emanating from China says as a result of the mining initiatives in full flow, the country’s iron ore production is to climb to 1.5bn tonnes by 2015 from 1.1bn tonnes last year. But since China has to live with ore poor in iron (Fe) content, post washing and quality upgradation, the country will have indigenous supply of finished ore of 760mt in 2015 when its steel industry’s demand for the mineral will be about 1.3bn tonnes. Big imports, therefore will still be unavoidable. But the important thing is China’s import dependence on ore then will be down to 42% of total requirements from a high of 63% in 2010.
The Chinese posturing and future planning with a sense of urgency have no doubt been triggered by the uncompromising stand of the big miners to dispense with yearly contracts. As quarterly contracts became the order of the day, Chinese steel mills like their counterparts elsewhere had to bear the brunt of a 61% rise in iron ore price to $145 a tonne in 2010. Iron ore imports by China last year fell 1.4% to 619mt. But the new pricing system and the fact of commodity cycle drove the ore rates so high that China ended up picking an extra import bill of $30bn last year. This, according to the Chinese ministry of industry and Information Technology, was largely responsible for squeezing the steel industry’s margins to 2.9% in 2010 from 7.3% in 2007. In fact, raw materials costs climbed so high that steel turned into one of the worst performing industries in China where the average profit margin for industrial companies was 6.2% last year.
Besides what is being done to step up mining within the country, China has come to believe that there will be moderation in iron ore prices in future years as big ticket investments in opening new mines and expanding many of the operating mines come to fruition. An official of the China Mining Association says,“surging prices of iron ore since 2003 has attracted a huge amount of investment in the sector and there will soon be a concentrated release of capacity breaking the monopoly a few big hold.” Incidentally, the big three in the business account for two-thirds of global supply of iron ore.
The Chinese official further says the global iron ore reserve is so rich and so widely spread that the requirements of the steel industry could easily be met for the next 100 years and more. BHP,Vale and Rio have ownership of some high quality ore and with huge surplus funds at their disposal, they will always remain in the prowl for virgin deposits. “But they don’t have all of world resources. China will be less and less dependent on them as it steps up its own production and diversifies its iron ore procurement points,” the official points out. The likes of Vale and BHP cannot but take serious note of the Chinese long-term plans.
In the meantime, China is employing resource diplomacy to the fullest to see that Africa becomes the world’s next iron ore frontier. For this to happen African countries endowed with iron ore deposits will have to have infrastructure for egress of the mineral from mines through roads and rail to ports for export
and political stability. China’s progress in getting access to all types of minerals and oil and gas resources in Africa has taken the western countries by surprise, if not shock. Analysts think this has been possible largely because China has dared to go to what are seen as ‘high risk’ countries in that continent with offer of building infrastructure on attractive terms.
Integrated service provider SMM Information and Technology says, “China is to increasingly turn to Africa to satisfy its iron ore needs as more Chinese companies look to invest or partner in mines. That Africa is destined to emerge as the next big supplier of industrial raw materials, including iron ore is underlined by the fact that while it accounts for some 20% of world resources, it hardly has a share of 2% of world trade.”
Hemant M Nerurkar, managing director of Tata Steel which bought the European Corus Group in January 2007, says the “easier sources of iron ore are now more or less depleted or are already in use. So the next sources are going to be a little more difficult as these will be further in the hinterland and will, therefore, have logistic and port issues. These issues are required to be tackled before the next round of sources starts yielding iron ore.” China understood the challenges inherent in acquiring iron ore or any other mineral assets in foreign shores ahead of others.
In Nerurkar’s observation “in the long run, iron ore will globally be available in plenty and there will be no real shortages,” one finds confirmation of the Chinese belief that the price dictating power of a few groups will weaken over the years. In recent weeks, iron ore depending on its Fe content is selling in the range of $172 to $185 a tonne. This price range will not hold as new capacity comes on production stream.This should start happening in 2013. But at the same time Nerurkar says,“I don’t see prices of good old days returning. I don’t expect to see prices falling below $110 to $100 a tonne.” Some analysts think that the world is moving in the direction of an ‘oversupplied’ situation from what is now a ‘tight supply’ scene in the next couple of years, thanks to China and the rest of the world fast expanding their iron ore production. In a future oversupplied situation, competition among producers will see them giving increasing attention to product quality, cost and supply reliability. All this will work to the advantage of iron ore buyers.
The share of raw materials in the production cost of steel has risen so significantly in the last five years that major steel groups across the world are feeling the need for vertical integration of their operations from mining to making the metal. The migration to quarterly/monthly contracts has only added to the urgency of such integration. ArcelorMittal, Chinese steelmakers singly or jointly and Tata Steel for its European plants will remain in iron ore asset hunt. One important reason why ArcelorMittal or South Korean Pohang Steel is keen to build steel mills in India is because of government assurances of giving linkages to iron ore mines.