13.3
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Iron Ore Market Analysis
13.3.1 |
Introduction
The iron ore sector is a global industry with 2004 revenues of over USD34 billion, of which USD17 billion
derived from the seaborne market. Australia and Brazil are the key suppliers of seaborne iron ore; Asian
(in developed Asia and China) and European steel producers are the major customers.
In the production of steel, scrap metal is the only substitute for iron ore. Most of the iron ore is used in blast
furnaces (sintered, or as pellets/lump) using coke as primary reductant, but alternative reduction routes (direct
reduction or even smelting reduction) are gaining importance.
Economic development and population growth drive steel demand, and thus demand for its raw materials.
Scrap availability and technology choices determine the final demand for the various iron ore products.
Demand for seaborne ore tends to grow at a faster rate than total ore demand, due to quality and availability
issues of local ores, particularly in China.
In the last decade, the industry consolidation in the seaborne iron ore market has increased significantly.
As a result, real prices have been constant, as opposed to average real annual price declines of 2% – 3%
during most of the eighties and early nineties.
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13.3.2 |
Iron Ore Demand Analysis
Demand for Steel: Steady growth of steel demand is expected until 2025. Critical assumptions are:
No major “world-wide” crisis that would either destabilise the economy of the developed regions or induce
a ‘hard landing’ for the Chinese economy.
The Chinese economy continuing to grow (but slower than currently) at a healthy rate until 2008 – 2010.
Post-2010 growth rates in the 4% – 6% range were assumed, similar to those observed in Japan, after its
phase of rapid economic expansion. The urbanisation rate in China of 1% p.a. is foreseen to be sustained
for the next 20 – 25 years.
Relatively slow economic growth in the developed world is anticipated, with negative implications for steel
consumption, due to delocation of manufacturing capacities to emerging markets.
No immediate ‘boom’ of the Indian economy is expected, but a rather moderate short- and medium-term
growth path, only taking off beyond 2015.
Continued moderate growth in CIS and South America, not assuming any major setbacks in these regions,
was assumed.
Demand for Iron Ore: The iron ore market is expected to remain attractive in the next two decades, based
on positive underlying fundamentals. These include steady growth of iron ore demand at least up to 2020
(about 30% increase from today’s levels), particularly in the seaborne market (growth of more than 45%).
China will represent close to 50% of total iron ore demand in 2025 (up from 31% in 2004). In 2004, China
accounted for 34% of the 600Mt seaborne demand. Eventually, the market becomes predominantly Chinese,
representing close to 80% of total seaborne demand of 880Mt in 2025.
One of the key factors boosting the iron ore market is a developing scrap shortage. The ratio of scrap to
finished steel has reduced over the last years to a low of 46% versus historical levels of 50% – 55%.
These lower levels should prevail until 2015 – 2020. This long period of relative scrap shortage will help to
fuel an iron ore boom. As of 2015 – 2020, more scrap is expected to become available again which will limit
further iron ore growth.
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13.3.3 |
Iron Ore Supply Analysis
What had been mostly the terrain of relatively cheap brownfields expansion for two decades, now demands
significant greenfields expansions. This capacity expansion is expected to be led by the three largest
producers (CVRD, Rio Tinto and BHP-Billiton), who will continue to use the modularity and flexibility of their
production systems to avoid overcapacity coming in and putting undue pressure on prices. The largest
producers are also uniquely involved in price setting and have long-term volume contracts with major
customers, creating entry barriers for newcomers.
The combined (controlled or influenced) market share of the three dominant producers is projected at
approximately 75% to 2025; today they also control over 80% of the relevant port capacity, as well as 6 out
of 7 major railway systems. The CIS is also expected to play a major role in the supply of iron ore/metallics.
As far as iron ore exports are concerned, the CIS is expected to focus only on pellets for the European
market. In order to fully capture this market, and at the same time satisfy growing local demand (CIS steel
consumption and steel exports), CIS will need to increase iron ore production by 30 – 50Mt between 2004
and 2025, without increasing its deep-sea exports.
India could increase iron ore production in the medium term from 135Mt in 2004 to around 160Mt in 2010.
As a result, seaborne exports will increase to 80Mt in 2010 (up from 65Mt in 2004). Beyond 2010, seaborne
exports are expected to strongly decrease, as the Indian Government wants to preserve iron ore to the
maximum for the domestic steel industry, serving local and export demand. This decline could come even
earlier if the Government starts enforcing environmental and other mining-related legislation.
The current high iron ore prices might lead to short term increases in Chinese domestic iron ore production
(and hence reduce Chinese seaborne demand). In the longer run, a decline in domestic ore production is
projected. China will become more and more dependent on seaborne iron ore due to the increase in iron ore
needs on one hand and limited economically viable domestic reserves on the other hand. As a result, overall
share of domestic ore over total ore consumption in China is expected to drop from about 50% in 2004 to
some 20% in 2025.
Increasing vertical integration by major steel makers (e.g. Mittal), leading to somewhat reduced seaborne
demand, is forecast in the longer term.
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13.3.4 |
Iron Ore Supply and Demand Balance
The currently announced and fully committed expansion plans should be sufficient to satisfy the expected
increase in demand up to 2010 – 2012. Longer term, there is a need for new greenfields iron ore systems.
From a logistics, operational cost and quality point of view, projects in Australia, Brazil and Africa (both South
and West) are most likely. None of these “second expansion wave” projects are likely to be realised before
2012, due to infrastructure limitations or geo-political risks.
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13.3.5 |
Iron Ore Price Forecasts
In the 1960s and early 1970s, under the impetus of materials-intensive Japanese economic expansion, iron
ore prices increased well above inflation rates, as new capacities were required to satisfy Japanese iron ore
demand. Most likely, a similar scenario will develop, now driven by Chinese demand.
Historically, iron ore price levels correspond to ‘incentive pricing’ levels with regard to industry cost curves,
allowing existing players to earn attractive returns on brownfield expansion projects. Given the highly
consolidated nature of the market, the history of incentive-based pricing and the need for over 350Mt new
capacity, it is anticipated that incentive-based pricing will persist for the foreseeable future.
Recently, both spot and contract prices have ‘detached’ from the cost curves, which is considered a
short-term anomaly. Current high price levels, driven by short-term supply constraints, should be short lived
(1 – 2 years) and should come down in the near term to more economic price levels, to avoid overcapacity
build-up. The full greenfield cost of new potential iron ore systems (e.g. West Africa and Australia) has
increased recently due to the current commodity price boom and the consequent equipment and skill
shortages (at least for the short and medium term).
Given the need for significant greenfield capacity additions in the medium term, it is expected that greenfield
incentive pricing (at full cost) will prevail until at least 2015, resulting in medium term price levels of USc40 –
42/dmtu for Hammersley fines, FOB Australia. In the longer term, i.e. 2020 – 2025, a brownfield incentive pricing
logic – where prices are set at levels to allow for new pits to be opened within existing mining systems –
is considered appropriate. This translates into an USc34 – 37/dmtu long-term price band for Hammersley fines.
These price forecasts are made based on the assumption that the large producers will cede volume to new
entrants to avoid overcapacity in the market, rather than defend market share through price adjustments.
Value-in-use considerations of lump versus fines are used to calculate lump premiums. The use of lump
results in higher coke consumption than what is required for pellets and sinter, but saves agglomeration costs.
In the longer term (i.e. beyond 2010), with assumed coke prices of USD145 – 175t, this results in an
USc6 – 9/dmtu lump premium. In view of the relative shortage of supply of quality lump, the high end of this
range, i.e. USc9/dmtu, is used, in line with historical lump premiums.
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