JOHANNESBURG (miningweekly.com) - Bucking the global cutback trend, the world's fourth-largest iron-ore producer, South Africa's Kumba Iron Ore (KIO), planned to increase its production by 10% in 2009, "market permitting", and was currently rerouting iron-ore not taken up by Europe and Japan to China, KIO CEO Chris Griffith said on Monday.

Announcing an 86% increase in 2008 revenues to R21,4-billion and a doubled operating profit to R13,5-billion, Griffith said that the company was continuing to target its "next tier" of customers in China.

Griffith said that China had bought "quite substantially more than its contractual volumes" and KIO was redirecting some of the volumes from Europe and Japan into China.

"We seem to be seeing some of the benefits of the stimulus package in China. We are seeing stockpile levels in China coming down. We are seeing an increase in steel production in China," he said, adding that the company was looking to an upside on last year.

The KIO marketing team had spent November and December in China, convincing particularly second-tier and third-tier Chinese steel mills to take KIO product, which was last year produced at a rate of more that 37-million tons a year.

"Even at this pretty difficult time, we are continuing to generate substantial amounts of cash," Griffith said.

KIO was managing to sell at prices above the spot price for its lower-quality material, albeit at discounted prices, but was not prepared, at this stage, to sell its higher-quality iron ore at a discount.

The JSE-listed KIO was producing at a landed cost into China of between $35/t and $40/t, against a current $80/t-plus spot price for 63,5% fines.

KIO was earning 50% margins on this business and continuing to move volumes at 50% margins would be KIO's "first port of call". It would only consider cutbacks should such opportunity cease.

"We can at least look after another seven million tons of stockpiled capacity before we would need to review our decision to continue producing," Griffith said.

Chinese contract customers had been given an opportunity to increase their offtake of lower-quality iron-ore at a discount to the long-term contract price.

"Even if we take a price reduction, we still have a fantastic margin," Griffith said.

Offers had also been made to Chinese steel mills with which KIO did not have long-term contracts, in an attempt to sell contractual volumes not taken by Europe and Japan. KIO GM: commercial Timo Smit told Mining Weekly Online that Korean offtake was on the rise as a result of KIO signing a second Korean customer, but the rise would be only slight, and towards the end of the iron-ore year, which culminated in March.

Griffith said that KIO was effectively "fully sold out" of its lower-quality materials and had decided to stockpile rather than discount any excess higher-quality dense-media separation (DMS) lump ore, since it believed that the medium- to long-term demand for DMS lump remained strong.

The company would be maintaining DMS production at just over 28-million tons in 2009 and the jig plant ramp-up was continuing with its annualised design capacity of 13-million tons expected in the last quarter of 2009.

KIO had introduced cash preservation and cost containing measures and Griffith said that the decision of the South African Treasury to defer the imposition of mining royalties until 2010 would assist the company to reduce anticipated costs "in these trying times".

The company believed that the upturn in the iron-ore market would be before 2012/13, which was why it was continuing to invest in the Sishen South project, which it was able to fund through debt at this point in time.

The company had presented a new ports and shipping strategy to the board, from which it hoped to increase the value it could extract from the value chain by, among other things, participating more in its cost, insurance and freight (CIF) activities. It was leveraging its relationships with port authorities.

Until now there was no room to participate in rail because Transnet Freight Rail had not made that option available, but that “door now seems slightly open to us” in the form of a potential public private partnership (PPP) and the company would look to progress PPP possibilities in 2009.

On the possibility of the introduction of transparent “screen-based” iron-ore pricing, Smit told Mining Weekly Online that as the No 4 in the industry, the company was not in a position to take the lead in how iron-ore was priced.

The benchmark system of pricing continued to prevail, Smit said, although it had been “under attack” mainly as a result of freight-rate differentials, but now that those had declined dramatically, the attack was no longer as intense.

Many ion-ore producers had come out in favour of the benchmark system, as have many of the steel mills, but KIO would operate in whatever system applied.

On price transparency, he said the KIO’s 2008-2009 contract prices had risen 93% as a result of, among other things, a premium being paid on niche products.

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