Johannesburg – Frighteningly large investments are being
made globally, particularly in Australia, to develop iron-ore and coal mines.
The latest evidence of the feverish attempts to get hold of
iron ore is Exxaro’s offer last week of a 49% premium on a medium-sized iron
ore mine being developed by African Iron in the Republic of Congo.
It is clear that Exxaro Resources [JSE:EXX] has long had its
eye on its Central African prey.
But while the relatively young South African mining group
has been putting finishing touches to the takeover bid, the price of iron ore
on global markets has quickly begun to fall from a record $175/tonne last year
to$131.50/tonne. Last week this price stabilised at 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. Over the
next 10 years they plan to spend $115bn (R925bn) on infrastructure to this end.
The Bloomberg news service has calculated that, through
these plans, 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 [JSE:BIL]
and Rio Tinto mined some 500m tonnes 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 538m tonnes 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 199m tonnes, to
390m tonnes 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
immediately cause prices to collapse in a heap.
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 15m tonnes of coal a year.
Queensland’s government now wants to enlarge this port to a
carrying capacity of 385m tonnes a year. (Richards Bay, one of the two largest
coal ports in the world, currently exports around 65m tonnes a year and has a
handling capacity or 91m tonnes.)
China is the driving force behind the demand for iron ore,
producing the equivalent of around 350m tonnes a year in its domestic iron-ore
mines.
This ore is of such a poor quality that it probably takes
closer to 700m tonnes 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. The current
cost of producing ore in the Congo is around $45/tonne, which still leaves a
comfortable margin.
- Sake24
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