While demand for iron-ore is expected to grow during 2013, the current boom in prices has been partially supported by a restocking phase in China, which will eventually end, states metals and minerals information provider Roskill Information Services.
However, the company notes that 2013 is shaping up to be an interesting year for iron-ore. “As prices peaked at $158.90/t in February – an 80% increase over the lows in September last year – optimism appeared to have briefly returned to the market but on March 14, the spot price of 62% iron-ore for delivery to China fell to $144.10/t.”
Roskill forecasts that the recovery in iron-ore demand is temporary and that, in the coming years, the price will drop to below $100/t and, possibly, to below $90/t.
“These prices are insufficient to stir the type of investment that junior miners need to benefit from iron-ore. Therefore, future demand for iron-ore will most likely be met by established iron-ore producers’ large-scale and low-cost projects,” states Roskill Information Services senior economic analyst Thomas Höhne-Sparborth.
“Moreover, new large-scale and low-cost projects are expected to come on stream during 2013 and beyond, which will ease the availability of supplies on the market and place downward pressure on prices,” he adds.
The lows in the price of iron-ore, which reached its bottom in September 2012 at $88/t, were primarily the result of a decrease in demand from China for the base metals, Höhne-Sparborth points out.
He explains that, owing to the slowdown of the Chinese economy, steelmakers entered a destocking phase and ran down their existing iron-ore stockpiles, instead of buying new shipments. “Reduced demand from China, moreover, coincided with continued depressed demand from the industrialised economies in the wake of the eurozone crisis,” he adds.
“Junior miners were hit the hardest during the price slump, as investor interest in iron-ore projects dissipated. Owing to their lack of an established cash flow, many juniors experienced difficult times,” Höhne-Sparborth explains.
He adds that small and large mining companies’ dependence on African infrastructural developments are also affecting the supply and demand of iron-ore.
In Africa, mining majors Rio Tinto and Vale have shifted their investment priorities away from their respective Simandou projects, in Guinea. As the vision of this area turning into the next Pilbara depends on sizeable investments in infrastructure, dampened enthusiasm between these iron-ore majors does not bode well for the junior companies that are seeking to invest in the African region’s future.
Further, projects by mining companies Atlas Iron, Brockman Resources, Hancock Prospecting and other entrants in the Pilbara region, in Western Australia, depend on the construction of a fourth Pilbara rail line; but with lower prices and competing expansions from established companies, such as a rail line may not secure the usage to render it economic.
“In the coming years, iron-ore will be increasingly characterised by cost-competitiveness, as lower prices will force high-cost operations out of the market.
“Therefore, Chinese producers will be most affected, as the low grade of Chinese ore generally results in a high cost of production,” states Höhne-Sparborth.
However, he notes that the gap will be filled by new projects, which require competi- tive operating costs to be realised. Ongoing overseas investment by steel producers from China, or other industrialising countries seeking to ensure access to supplies, can provide a lifeline for junior miners, but this also represents a highly competitive market, he explains.
Industry Expansions
First production of mining company BHP Billiton’s Jimblebar expansion, in the Pilbara region, was due in March and the company expects to reach a production rate of 183- million tons in the 2013 financial year, up 5% from 2012.
Rio Tinto is targeting iron-ore production of 290-million tons by early 2014, compared with 253-million tons in 2012. In addition, iron-ore producer Fortescue Metals Group (FMG) has restarted the development of its Kings deposit, in the Pilbara, and remains committed to reach 155-million tons of production this year.
Meanwhile, in Brazil, Vale is continuing the development of its S-11D expansion, which is expected to add 90-million tons, or about 30% of its current capacity, by 2016. “And although Anglo American’s Minas Rio project is commonly referred to as the world’s most expensive, iron-ore production is nonetheless set to start in 2015, to add an initial capacity of 26.5-million tons a year to the market,” states Höhne-Sparborth.
He stresses that, in contrast to the scale of these expansions by the leading players, juniors are struggling to get back on their feet. Following the 2012 slump in prices, projects that depend on speculative investment are failing to compete with those that are able to rely on a stable cash flow.
On the back of lower-demand growth forecasts and decreased concern over access to supplies, announcements of new joint ventures with steel companies have also diminished.
“As the prospects of projects are often linked, even promising assets are dragged down by the misfortunes of marginal players,” Höhne-Sparborth explains.
Thus, while the top players are expanding their capacity, the fortunes of iron-ore juniors have been reversed. In February 2011, when prices reached $200/t, the industry appeared to be set for increasing diversification. Currently, mining companies FMG, BHP Billiton and Rio Tinto appear on track to account for more than 75% of capacity expansions in the Pilbara region over the next five years.
“The story is much the same in Brazil and beyond, and further consolidation is the likely path of the future. Therefore, a great shakeout among the junior mining companies is probable,” Höhne-Sparborth concludes.