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Iron ore in a state of flux

Despite forecasts of modest demand growth for iron ore this year, there is no guarantee that volumes will increase at all.

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Port Hedland will benefit from the investment in new iron ore mining projects in the Pilbara region
Port Hedland will benefit from the investment in new iron ore mining projects in the Pilbara region

Most analysts believe that iron ore demand growth of 2% to 2.5% will take place this year, but there remains much uncertainty. On the positive side, China is expected to import between 2.2% and 2.5% more iron ore this year than in 2018 (1.06 Bt). This is hugely important, as volumes last year were down by 0.9% (approximately 10 Mt) on 2017.

 

The reason for the projected increase is a shift by steelmakers, partly at the behest of the Chinese Government, to use higher grade imported iron ore. Domestically mined ores are of inferior quality, are less productive in the steel milling process and cause more pollution. Consequently, many local mines are being closed.

 

Chinese tax cuts


The iron ore trade will also be helped by Premier Li Keqiang’s various economic stimuli measures. The most significant is a reduction in taxes. The 16% VAT levied on domestic manufacturers and small and micro enterprises will be cut to 13%, and the 10% rate paid by businesses in the transport and construction sectors will fall to 9%.


Meanwhile, growing trade with India and rising consumption of iron ore in the ASEAN trading bloc should boost volumes.


Another positive sign is that leading mining companies, such as Rio Tinto, BHP and Fortescue Metals Group, are investing in new capacity, automating operations and embracing digitalisation to curb production and supply chain costs.

 

But there are several negative factors. A general slowdown in the growth of the global economy, the ongoing trade dispute between China and the US, and a rise in protectionist policies in several countries are slowing manufacturing activity, the demand for steel and, consequently, iron ore consumption.


The demand for iron ore will also be affected by the development of many more electric arc furnaces, especially in China. These plants use scrap metal as their raw material, and not iron ore. There is an increasing supply of this material in China, and it is one of the country’s main cargo imports.

 

Furthermore, China continues to reduce its steel exports. The 59.2 Mt shipped last year was down 70% on the more than 100 Mt traded in 2015. China has faced accusations of dumping (selling below prroduction costs) steel in several markets. While some governments have slapped tariffs on the cargo, China is itself now cutting back.


There are also problems on the supply side, with events in Brazil and Australia raising concerns over just how much iron ore will be available to trade this year and at what price.

 

The collapse of the Brumadinho tailings dam at Vale’s Córrego de Feijão mine in Minas Gerais, Brazil, on 25 January resulted in 300 deaths and the company suspending activities at mines producing over 90 Mtpa of iron ore. This included its Brucutu mine complex, which is the company’s second largest with an output of 30 Mtpa of high-quality ore (FE content of 64% to 65%).

 

Vale also said the suspensions could impact iron ore pellet production to the tune of 11 Mtpa in 2019. Last year, its various plants, including Tubarão I, Tubarão II and São Luis, produced 55.3 Mt of pellets, up almost 10% on the previous year.


In capacity terms, Vale is the largest producer of iron ore in the world, and its mines produced over 380 Mt in 2018. This year, it expected to export 382 Mt, but the group has slashed its projections since the mining disaster.


In a recent conference call, Luciano Siani Pires, CFO of Vale, said: “Our expectation for 2019 is that, even in an optimistic scenario, it will have an impact of 50 Mt, while a more conservative scenario will have an impact of between 65 Mt and 75 Mt on our earlier forecast.” Moreover, it is possible that Vale’s supplies could be constrained until 2024.

Uncertainty in iron ore market is putting pressure on large ore carriers & other classes of tonnage
Uncertainty in iron ore market is putting pressure on large ore carriers & other classes of tonnage

Yet another blow

 

The miner encountered yet more problems in February. A fire in a conveyor belt room at its transhipment centre at the port of Lumut in west Malaysia halted operations for more than 10 days. An estimated 0.6 to 1 Mt of cargo was delayed in the port as a consequence. Meanwhile, one of its main export terminals in the port of Vitória (Espírito Santo) was closed for almost a week, and the group was fined BRL35M (US$8.9M) as a result of waste residues leaking into the sea.


In Australia, Cyclone Veronica closed the ports of Dampier, Port Hedland and Ashburton in the Pilbara region for an average of four to five days in March.

 

Further disruption in the supply chain was caused by subsequent clean-up and repair activities at the mines and to rail line and ports/terminals used to move the cargo. This affected daily export volumes of all companies in the region, including major producers such as BHP, Rio Tinto, Fortescue and Roy Hill. Overall, the tropical storm is believed to have cost Australia’s iron ore industry over US$1B, with in excess of 10 Mt of iron ore exports affected.


The events in Brazil and Australia, together with current demand trends in China, have had a significant impact on the dry bulk market as a whole. This is no surprise given that Australia and Brazil account for 70% of iron ore exports and China buys 72% of the seaborne trade in the commodity.


Specifically, Capesize, Newcastlemax and Valemax tonnage have been affected as more than 30% of the world’s iron ore trade is transported in ships of 170,000 dwt and larger.

 

At the end of March, the Baltic Dry Index stood at just 689 points, and had fallen by 46% since the beginning of the year. Meanwhile, the index for Capesize tonnage posted a record low of 150 points.


Role for Africa

 

As to the future, there is hope that West Africa will play a bigger role in the iron ore trades. Interest in mining projects in countries such as Cameroon, the Democratic Republic of Congo and Gabon is picking up again.

 

In Angola, Toyota Tsusho Corporation (TTC) has signed a JPY70B (US$625M) contract with the Ministry of Transport to rehabilitate the Sacomar iron ore export terminal and expand the container terminal at Namibe. Sacomar has fallen into disrepair, and TTC will build a new jetty, install handling systems and develop additional storage areas to accommodate iron ore from the Kassinga mine, which is being reopened.

 

In Guinea, a tie-up between Niron Metals, which is controlled by Mick Davis, ex-CEO of Xstrata, and the mining tycoon Beny Steinmetz, could lead to the eventual commissioning of the Zogota iron ore mine in the south of the country. Existing infrastructure, including use of a rail line connecting Mount Nimba in Guinea with the port of Buchanan in Liberia, will be used to transport the ore.


But Guinea has proved a huge challenge for many companies, and there is no guarantee that the latest venture will be successful.

 

In South Africa, investors remain nervous about the country’s new Mining Charter, and several projects have been deferred or cancelled. In 2018, South Africa’s mining output fell more than 5% year-on-year.

 

But a large-scale project in the Northern Cape is being pursued. Involving a potential investment of ZAR15B (US$1.1B), the Boegoebaai Port and Rail Project is sponsored by various state agencies including the parastatal ports, rail and pipelines company Transnet SOC.

 

Boegoebaai will have two berths, one of which will be dedicated to the handling of dry bulk exports and dredged to accommodate Capesize tonnage. It will have the yard area and equipment to process between 5 and 10 Mtpa of iron ore, 2 to 5 Mtpa of manganese ore, and 1-2 Mtpa of lead and/or zinc.

 

Big plans


Some of the largest investments are underway in Australia and India.

 

These include:

  • Rio Tinto’s US$2.6B plan to develop the Koodaideri mine in Western Australia and build a 166 km rail line connecting it to the national network. The new mine, which will feature extremely high levels of automation, will open in late 2021. On full completion of phase one, it will produce 43 Mtpa of high-quality Pilbara Blend iron ore. Phase two could raise output to 70 Mtpa.
  • Rio Tinto and its joint venture partners, Mitsui and Nippon Steel & Sumitomo Metal, are investing US$967M in developing the Mesa B, C and H deposits at Robe Valley, and US$579M to mine deposits C and D at West Angelas.
  • BHP Group (85%) and partners Itochu Corp (8%) and Mitsui (7%) are developing the South Flank mine in Western Australia as a replacement for the 80 Mtpa Yandi complex. Approximately US$3.4B will be invested in the project, with phase one opening in 2021.
  • Fortescue Metals Group is spending US$1.3B to develop the Eliwana Mine. Throughout its scheduled 24-year operating life, it will produce 30 to 50 Mtpa.
  • CU-River Mining is concluding a deal with Flinders Power Partnership to buy the old Port Augusta power station and transform the site into a port for handling iron ore.
China Iron Ore Steel Growth
China Iron Ore Steel Growth

Cooperation

 

In other developments in Australia, Rio Tinto and the giant steel group China Baowu have extended their long-term cooperation agreement in the Bao-HI joint venture, which owns the Eastern and Western Range mines in the Pilbara region.

 

In India, the nation’s main steel producers are involved in most dry bulk projects. This is because a key objective of the developments is to improve the cost-competitiveness of their supply chains.


Mumbai-headquartered Tata Steel has taken a 51% equity stake in the Subarnarekha port project in the northern part of the state of Odisha in the Bay of Bengal. Its partner is Chennai Port Development Ltd, which has the build-andoperate concession for the port.


Subarnarekha is located about 270 km south of the company’s steel mill at Jamshedpur. In the first phase of the development, three to four berths for handling dry bulk and general cargo will be built. This will give Subarnarekha the capacity to process up to 25 Mtpa of cargo (see news, p1).


Elsewhere on India’s eastern seaboard, the Essar Group recently opened the Essar Vizag Terminal Ltd (EVTL), which is a specialist all-weather iron ore handling facility. Located in the port of Vishakhapatnam, it can handle 200,000 dwt Capesize vessels and has the capacity to process 24 Mtpa of the product.


On the west coast, Essar is investing US$70M to expand its dry bulk handling facility at the port of Hazira. The project will raise the terminal’s throughput capacity to 15 Mtpa. It involves the construction of a new jetty, erection of several ship-unloaders, and installation of a new conveyor belt system.

 

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