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China’s demand for our iron ore stalls, sending the price for our biggest earner spiraling


November 09, 2022

China’s demand for our iron ore stalls, sending the price for our biggest earner spiraling

Australian miners unearth more iron ore than anywhere else in the world — but they want to increase that.

The big three players, Rio Tinto, BHP and Fortescue Metals Group (FMG) have all launched new mines since mid-last year.

But as our biggest customer, China, continues its economic slowdown, demand for the red earth has been wavering.

Which has seen the price for our most valuable commodity sink.

“The iron ore price has been particularly weak in recent weeks, it has started to roll over, but it’s actually been coming off now for most of the year,” UBS Co-Head of Resources Research, Lachlan Shaw, told The Business.

In May last year, iron ore reached a record high, about $US240 ($371) a tonne.

Now, it’s hovering around the $US80 a tonne mark.

The biggest factor causing the price slump is China’s property market crash.

“We’re seeing the steepest downturn in property activity in China, in years, arguably decades, as the industry there struggles with liquidity and policy from the government,” explained Mr Shaw.

“The combination of developer funding challenges and lack of demand is seeing property purchases in China very, very weak.”

“That’s been traditionally, for the last decade or two, probably a third or more of China’s steel demand, and therefore over a sixth of global steel demand.”

Mr Shaw added, the broader global downturn isn’t good news either.

“We’ve also seen steel demand in the rest of the world start to weaken as well, reflecting the impact of high energy prices, but also, central bank’s increasing interest rates.”

Miners aren’t worried

None of this seemed to phase FMG executive chairman Andrew Forrest last week as he gave the go ahead for the first ore to make its way through the still under-construction processing facility at its newest mine, Iron Bridge.

The new mine is on track to ship its first tonnes in the March quarter, ultimately ramping up to 22 million tonnes a year.

It’ll add to the 189 million tonnes of iron ore shipped by FMG last financial year.

“Iron Bridge was one of our first projects we looked at back in 2003, but you always wait to get the technology right, the people right and the settings right,” Mr Forrest told The Business.

“Now we’re simply excited to see it happen.”

Rio Tinto is well on the way to full capacity at its newest mine, Gudai-Darri, which shipped its first ore in the middle of this year.

“It will provide about 43 million tonnes of capacity as we continue to ramp that up, and it’s a mine that’s going to operate for decades,” Rio Tinto’s Iron Ore chief executive, Simon Trott, told The Business.

Those extra tonnes from Gudai-Darri, Rio Tinto’s 17th iron ore mine in the Pilbara, will replace some of the shortfalls that are starting to be found in some of its older mines.

“We’ve been operating in the Pilbara for more than 50 years and we’re continuing to deplete our existing mines, so we’ll need to continue to bring on new mines to sustain our business in the longer term,” Mr Trott explained.

The additional ore from Gudai-Darri will see Rio’s output increase from an estimated 320 million tonnes this year, up to between 345 and 360 million tonnes by about 2026/27.

Rio has also just announced it plans to begin work on developing another reserve, Rhodes Ridge, with a goal to be shipping iron ore from there by the end of this decade.

It estimates there’s 5.8 billion tonnes of high grade iron ore in that reserve.

Mining is a long game

Mr Trott told ABC News, the price fluctuations are worth considering, but the economics of mining stack up over years. 

“We are seeing some short term weakness, particularly with inflation and interest rates rising in the western world, and those events, combined with some impact from COVID lockdowns on the property sector in China, and so we have seen a pullback in iron ore prices of late.

“But the long term future for the iron ore business is strong, the world continues to need steel and will continue to need steel for the lives people want to live as well as future decarbonisation.”

“The investment decisions we make are based on our view over decades, so our long term belief in the iron ore market is unchanged.”

BHP shares that view.

It’s close to reaching full capacity at South Flank, a mine it began shipping iron ore from, mid last year.

“We set ourselves a target of ramping up to its nameplate capacity of 80 million tonnes per annum over three years, and I’m pretty pleased to say that we are ahead of almost all of those targets,” BHP’s WA Iron Ore Asset president, Brandon Craig, told The Business.

It’s also designed to replace some of the falling tonnages BHP is experiencing, which still mines at one of the very first WA iron ore discoveries from 1957, Mt Whaleback.

“South Flank was originally conceived to be the replacement for the Yandi operation.”

Yandi opened in 1991 and by 2017 had produced one-billion tonnes of ore.

“The Yandi resource was approaching end of life and we needed to bring in some new mining resource to actually replace that,” Mr Craig said.

“We’ve been in the process of ramping Yandi down for a couple of years, but in concert with that, we’ve been bringing up the production of South Flank to offset that.”

But BHP isn’t just thinking about replacing older mines, Mr Craig also wants to increase BHP’s rate of production, currently about 290 million tonnes a year.

“We want to creep that through productivity to about 300 million tonnes per annum, but when we look at the long term fundamentals of the market, we think we think there’s a strong case to keep pushing that and grow the business further.

“So we’re currently studying growing the business to 330 million tonnes per annum.”

“We’re feeling pretty confident the market will be supportive of a production level in that upper range.”

Supply side risk

There comes a point, if supply outstrips demand, where it becomes uneconomical for some to operate.

“The dynamic that is in front of us is a situation of stalling demand and rising supply and that’s usually accompanied by falling commodity prices, and that’s what we’ve seen,” said Mr Shaw.

He thinks the price is close to its floor.

“The key level that we’re identifying for now is around $US75 to $US80 per tonne,” he said.

Mr Shaw explained, that’s the range he thinks some miners, operating at high cost margins, will start to ease off production.

“We certainly see the demand weakness continuing and on the supply side, what we’re seeing now is all of the world’s major producers, talking to increase production, so that’s an increased supply of iron ore heading into next year,” Mr Shaw added.

“The key for the market now will be to come to grips with where cost support kicks in, that is, when do commodity prices start to move inside the cost curve, and start to pressure iron ore miners to stop mining because they’re losing cash.”

That will eventually reduce the overall supply, which will then, theoretically, see the price start to rise, and the cycle begins again.

Exports are down and so are government taxes

While iron ore remains our largest commodity export, falling demand has seen a hit to export income.

The federal government expects it to deliver $119 billion in export earnings this financial year as more than 903 million tonnes is shipped overseas.

But that’s down on recent financial returns.

During a visit to Perth last week to spruik the mini budget, Treasurer Jim Chalmers conceded there’ll be less revenue from the big iron ore miners to prop up the budget.

“Commodity prices have made a big contribution, a welcome contribution to the budget position and we’ve taken a really responsible approach to that and banked almost all of the revenue surge over the next couple of years,” the treasurer said.

“Since the middle of the year, the price for iron ore has come off a bit. Our job is to continue to take a really conservative approach to the revenue that we get from commodities.”

The government uses an estimate of $US55 a tonne for iron ore when assuming its revenue from the mining sector in preparing the budget.

Current prices, about $US80 a tonne, are still higher than that, but nowhere near the almost five-times as much at the price peak.

If the current supply and demand scenario keeps playing out, prices will keep falling, and Mr Chalmers will have even less of a windfall come the full budget in May.

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