Advisory and consultancy firm the AME group forecasts modest growth in US iron-ore demand over the next three to five years, based on a recovering domestic economy.
However, the firm thinks the risks are on the upside, with President Donald Trump’s new administration having pledged multibillion-dollar infrastructure initiatives that will source domestic steel supply. This is set to benefit the vertically integrated US iron-ore industry, which has an estimated five-million tonnes to eight-million tonnes a year of latent capacity.
AME Group chief economist Mark Pervan explains that historically, US iron-ore production has been highly concentrated among two or three large producers. In 2015, integrated steel and mining company ArcelorMittal, integrated steel producer US Steel and iron-ore mining company Cliffs Natural Resources accounted for 94% of domestic supply.
“This high concentration of the domestic supply appears motivated by iron-ore mines being linked to a small number of integrated large steel mills in the heavily populated north-east states.”
However, the bulk of the newer steel capacity in the US has been produced using electric arc furnace (EAF) technology, which is sourcing feedstock predominately from nearby scrap steel supply, Pervan says.
Meanwhile, US iron-ore imports have had a diminishing impact on domestic supply. In 2005, the US imported just over 12-million tonnes of iron-ore, mostly from Canada and Brazil, which accounted for 23% of domestic consumption. In 2015, this percentage dropped to 12%.
“We think this trend is likely to continue, with the bulk of the new US steel production coming from EAF capacity, which uses a combination of scrap steel and domestic direct reduced iron (DRI) supply,” Pervan explains.
He adds that two of the biggest hurdles in the global iron-ore mining industry are transportation costs and ore quality.
“US iron-ore suppliers suffer on both fronts – being far away from key seaborne Asian markets and producing essentially a high-cost pellet and DRI product. The benefit is that they are close to a potentially improving domestic steel market. We think the opportunity will lie in DRI and direct reduced pellet production, which is best suited for EAF steel production.”
Iron-ore mines in the US are mainly in the Lake Superior region, from Minnesota and Michigan. The quality of iron-ore is generally of a low grade, which requires upgrading to pellets for steel production.
In recent years, strong iron-ore market demand prompted heavy supply investment worldwide. However, Pervan notes that, with the sharp slowdown by key consuming country China, this rapid supply increase moved the seaborne market into substantial surplus.
This has led to widespread project reassessment by major and junior mining companies, with producers looking to scale back capacity expansions and identify operational efficiencies, states the AME group.
“The resulting sharp drop in prices has mainly impacted smaller mines, even in the top exporting countries of Brazil, Australia and South Africa. This supply gap has been taken up by major producers, such as BHP Billiton and Rio Tinto, which are exploiting their cost and product-quality advantage to secure market share,” he adds.
AME expects the increase in supply from these major producers to be offset by a further reduction in supply from smaller exporting countries, and Chinese domestic producers, leading to a net fall, or balance, in global supply.
The company explains that emerging high-cost regions of supply in West Africa and Canada will face significant supply risk over the medium term, as the industrialisation and urbanisation of developing economies – in particular China – which led to rapid growth in iron-ore demand over the past ten years, starts to diminish.
The pace of economic growth in China seems to be slowing significantly, compared with earlier years, and the resultant weaker steel fundamentals are starting to weigh on demand for iron-ore.
China’s iron-ore industry remains fragmented and comprises numerous small-scale, high-cost producers, many of which do not own beneficiation facilities. Therefore, the lack of domestic iron-ore supply in China will still result in Chinese steelmakers continuing to rely heavily on imported ore.