Iron ore: The Pacific is the key

In iron ore, it’s the Pacific that counts. The steel industry, and thus iron ore activity, is now concentrated there, and is driving global demand. Rising per capita steel usage in emerging markets in the region, especially China and India, is key to the iron ore picture, according to Magnus Ericsson with Raw Materials Group, who spoke Monday at the annual Investing in African Mining Indaba conference in Cape Town, South Africa.

Global iron ore production last year reached 1.98 billion tonnes, up about 8% from 2010, with Chinese imports accounting for 680 million tonnes of the total. Iron ore exports to all regions rose to 1.13 billion tonnes in 2011 from 1.07 billion tonnes in 2010. Seaborne exports have been increasing a little more rapidly than overall ore production.

Yet the longer term picture, while bullish for iron ore, may imply a less volatile situation, according to forecasts by the Raw Material Group.

"We are fairly pessimistic for the long-term future (of steel demand),” Ericsson noted. “There’s really only 3.3% total growth (in the group’s forecast) over the next 20 years in the steel industry. That’s what we base our forecasts on. … We call it a fair but conservative approach.”

By 2030, Ericsson said, demand for iron ore will reach 3.50 billion tonnes, nearly double the current level of 1.98 billion tonnes – slower than in recent years but still fairly strong. Numerous new iron mining projects exist in Australia, and the number of projects is also increasing in Latin America and Africa. Another “growth node” for iron ore, according to Ericsson, is Canada and the Canadian Arctic. Many of these areas suffer from difficult climactic conditions, lack of infrastructure, and in some cases political turmoil, which will help to underpin ore prices.

“So we see growing problems in getting mines into operation,” Ericsson said said. “We also see a lot of restrictions in iron ore trade … there are lots of supply constraints developing in the iron ore industry,” he added, with implications for the iron ore industry going forward.

Ericsson made the case that China continues to be more important than India in terms of iron ore demand, in part because the steel lobby there has been successful in trying to keep domestic iron ore sources at home. But India’s iron ore demand is not growing as rapidly as that of China, he noted.

“We’re a bit pessimistic about the growth in India in the sense that we don’t think that the very ambitious steel plants that we see (being developed in) India will really materialize to the full extent,” Ericsson said. He cited red tape and infrastructure problems. He added that the steel industry in India overall should continue to grow, but not at the same pace as that of China.

China, meanwhile, will continue to rely for some time on a handful of major mining companies abroad for much of its iron ore,” Ericsson said, adding that China has many mines but most of them are relatively small and high cost.

“The grade of Chinese (iron) mines is low and is getting lower,” Ericsson said. “There are really no mines producing more than a few million tonnes in China. The average mine produces perhaps 500,000 tonnes or less. … “This is the key reason, as I see it, that China has not been able to expand its production overseas in any significant way.”

These factors are well known in the industry. Not as well known is that China is spending on lot of exploration, Ericsson continued. Much of this exploration is going on within China – as much as USD$400 million a year – but results have been decidedly mixed.

“All those efforts have not been very successful so far … but it shows how important securing iron ore supply is to China,” Ericsson said, but added that China has also been active in going after offshore sources of ore, particularly those based in South America and Africa.

“The total volume (of these offshore operations) is about 100 million tonnes,” Ericsson said. But he added: “If you compare that with the (Chinese) goal of controlling 50% of the import volumes – that’s the goal for 2015 – they’re far from that goal … That is something the Chinese are going to struggle very hard to achieve.”

In summary, Ericsson noted that foreign direct investment in iron ore by the Chinese has been slower than anticipated, although it is expected to increase.

Chris Munford researches and writes about commodities, with an emphasis on steel raw materials and energy. He is based in the New York area.

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