https://www.miningweekly.com

Quick recovery of iron-ore prices unlikely as oversupply continues

4th December 2015

  

Font size: - +

There is no quick recovery in sight for iron-ore prices in the long run, with continued oversupply and slow global demand for iron-ore, says credit insurance services company Coface.

A global oversupply of iron-ore is one of the reasons that have led to the sharp decline in the iron-ore price since early 2013, adds Coface commercial analyst Andries Louw.

Iron-ore prices are expected to remain relatively low for the foreseeable future, he says. This oversupply is evident when considering the increasing output of the world’s two largest net exporting countries, Brazil and Australia.

Louw says Australia’s iron-ore exports contribute half of the world’s exports. Currently, Australia is the second-largest iron-ore producer globally, after Brazil.

With the completion of expansion projects during 2015, Australia is expected to have the capacity to add 100-million tons a year of iron-ore to the market. During 2014, Australia was able to export $60-billion in iron-ore, with a net export surplus increase of more than 35% over the preceding five years.

Brazil’s expansion was smaller in comparison, as it produced 320-million tons a year.

Australia and Brazil have some of the most cost-efficient mining operations, as borne out by the low production cost of roughly $30/t to $50/t.

Despite the low commodity prices, output from Brazil and Australia is expected to increase steadily over the coming years. Iron-ore is the greatest mined and exported mineral within Brazil’s mining sector and is expected to remain a prominent part of its economy, adds Coface.

Owing to higher production costs, it is expected that output will slow in countries such as the Ukraine and China, as smaller mining companies are increasingly put under pressure by the prevailing low iron-ore prices. These low prices, less effective mining procedures and lower-grade ore make mining unprofitable for smaller operations globally, explains Louw.

Larger companies, on the other hand, with lower production costs are using their industry position to gain market share by sustaining high production levels. This is forcing smaller operations to close down or seek partnerships in an attempt to remain profitable.

Local Environment
South Africa is currently the seventh-largest producer of iron-ore globally and the third-largest net exporter in terms of monetary value, producing roughly 78-million tons a year in 2014.

Seventy per cent of South Africa’s iron-ore exports, valued at $6.7-billion, are consumed by China. However, over the first half of 2015 exports to China fell by 0.3%.

Some of South Africa’s mines employ effective mining procedures brought about by factors such as labour instability, political interference and weak exchange rates, which have increased extraction costs. This has, subsequently, reduced profit margins, which suffered further with the continued low iron-ore prices.

In some instances, mining inefficiencies have forced consolidation of ineffective projects. Despite cutbacks and halted expansion, marginal increases in the production of iron-ore are still expected in South Africa over the coming years, states Louw.

With the current economic outlook, it is expected that South Africa’s iron-ore production will rise slightly to around 81-million tons by 2018 from about 78-million tons in 2014. The production of iron-ore rose steeply from 58-million tons in 2011 to 70-million tons in 2012, although the growth rate declined to 3.8% on a yearly basis in August last year.

Previous expansions from preceding years are expected to support current production growth. Instead of major capital expenditure aimed at expansion, most mines are likely to refocus their efforts on efficiency in an attempt to increase their narrowing profit margins.

In addition, the rapid expansion of iron-ore producers in West Africa could decrease South Africa’s dominance in Africa.

Impact of Chinese Economy
China is the world’s largest net importer of iron-ore, with net imports of the commodity totalling $93.5-billion a year, eclipsing the second-largest net importer, Japan, at $15.9-billion a year.

Therefore, with China’s declining economic growth, any shift in China’s iron-ore demand has a significant effect on the iron-ore and steel industries as a whole. Even though China is the world’s largest iron-ore-producing country, the grade of ore it mines is lower than the iron-ore it imports.

It has been estimated that the grade of marginal iron-ore in China has fallen from 41% in 2004 to 13% in 2013. Therefore, more complex and expensive mining processes are needed to refine these ores. Smaller mining operations account for 60% of China’s iron-ore output, with an extraction cost of about $120 per million tons.

Additional factors impacting on China’s lower demand for iron-ore include the decline in Chinese residential property construction as well as the slowdown of industries with high iron inputs.

With China experiencing a decline in steel consumption and the use of scrap metal in steel production, it is likely that its imports of iron-ore will slow significantly in the near future, says Coface.

The variations in the 84-million tons of iron-ore stockpiled at Chinese ports will continue to cause short-term price volatility.

Edited by Tracy Hancock
Creamer Media Contributing Editor

Comments

The content you are trying to access is only available to subscribers.

If you are already a subscriber, you can Login Here.

If you are not a subscriber, you can subscribe now, by selecting one of the below options.

For more information or assistance, please contact us at subscriptions@creamermedia.co.za.

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION