Once demand starts to improve and the oversupplied market corrects itself, investors may start to think about where the next generation of iron-ore will come from as gaps for future demand begin to emerge, says Sahaj Capital MD Antony Rayment.

He notes that good investments are likely to emerge, as assets, such as West African deposits that have been under strain in the current market, could be bought at relatively cheap prices.

In the medium term, projects that can achieve a reasonable profit margin at an iron-ore price of between $60/t and $65/t – cost and freight (CFR) to China – will attract investor interest, predicts Rayment.

“The iron-ore market needs another China,” says geology and mineral resources consulting services provider MSA Group principal consulting geologist Frieder Reichhardt.

China’s rapid industrial and urban growth caused a surge in demand and a frenzy of speculation, hoisting the iron-ore price to more than $180/t in February 2011 and, subsequently, causing the iron-ore oversupply which continues to persist, he explains.

Reichhardt speculates that India is the most likely country to pursue rapid modernisation equivalent to that of China, adding that Africa is another prospect, with a large portion of its population of more than one-billion demanding modern services such as rail and road infrastructure, hospitals, schools and airports.

However, many of India’s iron-ore mines are reopening, diminishing the export opportunities that a resurge in demand might have created for miners elsewhere.

In addition, owing to Africa’s lack of steelmaking facilities, demand for iron-ore from the continent is insignificant. Although Nigeria and South Africa have installed steelmaking capacity, these countries have to deal with challenges of power supply, says MSA head of geological services Brendan Clarke.

Africa’s competitiveness in terms of iron-ore production is further significantly curtailed by a lack of infrastructure in terms of power generation, rail lines and ports. West Africa has significant iron-ore deposits, which investors will consider for the next generation of iron-ore production; however, West African iron-ore mining cannot be competitive without efficient infrastructure, as iron-ore can be mined in many areas of the world, says Reichhardt.

Meanwhile, at the end of 2014, Anglo American’s iron-ore subsidiary Kumba Iron Ore reported in its integrated report that the unit cost at its Sishen mine, in the Northern Cape, was about $30/t, at current exchange rates, while Australian iron-ore mines, such as mining major Rio Tinto’s Pilbara mine, have unit costs of just below $20/t. Rayment explains that Australia’s stable geology and its enormous high-grade iron-ore deposits enable companies to achieve largely unrivalled costs from economies of scale.

While this has put pressure on South Africa’s iron-ore mining, including Kumba’s Sishen mine and its near-end-of-life Thabazimbi mine, in the Limpopo province, South Africa’s pit-to-destination port costs (CFR China) lie around the middle of the global cost curve, says Rayment.

Unlike the rest of the continent, South Africa has good logistics, he adds. The Saldanha Bay port is a world-class facility, undergoing further expansion, and the 861 km Sishen–Saldanha railway line, also known as the Ore Export line, is of good quality, he states.

Rayment further laments South Africa’s missed chances in the iron-ore industry during the iron-ore boom from 2008 to 2013.

During the price boom, South Africa’s iron-ore production increased marginally, while Australian production nearly tripled, notes Clarke.

Rayment says that, particularly, junior miners in the Northern Cape lost out, given that there were opportunities to enter into South Africa’s iron-ore market. These opportunities were created by the Department of Mineral Resources’ black economic-empowerment plans as well as Transnet’s plans to enable junior miners to have access to Kumba’s load- out facilities, Transnet’s rail and port facilities at Saldanha Bay.

However, these Northern Cape opportunities were not capitalised on properly, through, inter alia, lack of proper exploration and development, shortage of capital and unrealistic value expectations from title holders of exploration rights for potential investors. Currently, most assets owned by junior miners and title holders are simply not financially viable to mine at current ore prices, states Rayment. The tariffs imposed by Kumba, Transnet and Saldanha Bay port for the use of their respective facilities added quite significantly to the costs, further reducing the viability of these projects.

Looking Forward

Since April this year, the iron-ore price, after a slight recovery from $47/t to about $60/t, slumped below $50/t as of July 7 after Chinese stockpiles rebounded. Clarke suggests that the slight recovery was because of stronger demand from China as well as BHP Billiton having put some of its expansion plans on hold.

However, in the medium term, the outlook for iron-ore continues to be bleak, with the oversupply causing ratings agencies to consistently downgrade their predictions for the commodity.

Reichhardt argues that the iron-ore boom was largely fuelled by speculation and that the increased demand from China was significant, but not “off the charts”.

“The boom is the author of the next bust and the bust is the author of the next boom,” recites Clarke.

Rayment suggests that prices should begin to stabilise in the next 12 to 18 months, with Clarke adding that iron-ore’s recovery might take until beyond 2020 because of the longer wavelength of its commodity cycle, compared with that of other commodities.