LARA SMITH Some west African countries rely on iron-ore to stimulate their economies
Australian iron-ore miners’ intentions to increase their production, slow demand from India and China, and displaced high-cost miners will continue to contribute to the long-term global surplus of iron-ore, which has halved the price of the commodity over the past two years, says mining consultancy Core Consultants MD Lara Smith.
Smith says Core Consultants forecasts that iron-ore supply will increase by a compound annual growth rate (CAGR) of 7.2% by 2020, with demand forecast to grow by a 6% CAGR, extending the iron-ore surplus that has driven the price down to $51.15/t – less than a third of the February 2011 peak price of $187.18/t.
The first reason for the forecast surplus is that a number of Australian mines are expected to persistently expand their production, with mining majors BHP Billiton and Rio Tinto having stated their intentions to increase their export capacities by 2017 from 225-million tonnes to 270-million tonnes, and from 290-million tonnes to 360-million tonnes respectively.
The decisions of Australian producers to expand were made when prices were higher and the market was more bullish, notes Smith.
In addition, the capacity added by Rio Tinto, BHP Billiton and diversified metals and mining major Vale is at a cost of below $90/t. This has displaced the supply from smaller, higher-cost miners that are unable to achieve the economies of scale achieved by the majors. “This is supportive of a long-term thesis of lower iron-ore prices,” says Smith.
These lower prices have jeopardised the potential for iron-ore mining in West Africa and its production, currently at 25-million tons a year, could fall to zero by 2017, says Smith.
Partially owing to tough economic conditions, London Mining’s Marampa mine and African Minerals’ Tonkolili mine, both in Sierra Leone, went into administration in October 2014 and March 2015 repsectively. In addition, Sundance Resources’ Mbalam project, in Cameroon, and Rio Tinto’s Simandou project, in Guinea, are unlikely to be developed, she states.
Smith adds that currently “ . . . the situation is dire . . . some West African countries rely on mining iron-ore to stimulate their economies, but no capital is going to flow to high-risk jurisdictions to mine a product that is already substantially oversupplied”.
Further, China’s demand has slowed because of the stockpiling of iron-ore, as well as the country’s reduced gross domestic product (GDP) growth from more than 10% in 2010 to only about 7% currently.
In China, the residential property sector was the main driver of demand for iron-ore, but the sector has slowed down, and the primary demand for iron-ore now comes from the nonresidential property sector. Smith notes that China’s steel market is expected to expand by a CAGR of 4% by 2020, adding that China’s steel inventory levels are slowly decreasing.
Core Consultants predicts a 24% year-on-year reduction in China’s steel inventories, with China planning to remove 70-million tonnes of excess steel from the market this year. However, this is only a fraction of the steel inventory, with the excess estimated to be between 425-million tonnes and 600- million tonnes, says Smith.
Although India is expected to provide a boost in iron-ore demand, owing to the country’s clampdown on illegal mining, and its coastal steel mills, its slowdown in GDP growth, inconsistencies in energy supply and high inflation have resulted in lower demand from this region, while exports to India are expected to remain steady.