Iron ore set to surge
By Jesse Riseborough
Bloomberg News
Wednesday, November 28, 2007
PERTH: China, the largest steel maker in the world, will increase iron-ore imports as output is peaking at mines in the country, bolstering prices that have tripled in five years, Macquarie said.
"What is going to be crucial in driving the international demand for iron ore is what happens to domestic production in China," Jim Lennon, a senior commodities analyst at Macquarie, said Tuesday in Perth. "Already this year we have seen signs of the Chinese exhausting their potential to grow. It is inevitable over the next few years that production will start to peak and fall off."
BHP Billiton, Rio Tinto and Vale do Rio Doce, who supply 75 percent of the iron ore in the world, are planning to expand existing mines and dig new ones with prices tipped to rise as much as 50 percent next year, according to Macquarie and Goldman Sachs JBWere.
The booming Chinese economy is on course to exceed $3 trillion as early as this year, tripling in the space of a decade.
The country is importing more materials including iron ore, crude oil, zinc, copper and aluminum, driving up prices for the commodities.
Annual demand for iron ore in China may rise to more than 1 billion tons, from about 713 million tons this year, as demand for steel continues to rise, Lennon said.
"The reason why you are hearing all these announcements about expansion from BHP, Rio, Vale, is I think they are making the bet that the domestic market in China will fall by several hundred million" tons over the next 10 years, Lennon said. "That will then lead to an accelerated requirement for imports of iron ore."
Chinese domestic iron-ore production doubled over the past three to four years to about 330 million metric tons this year, Lennon said.
Investment in new mines has declined and the grade of iron being produced from existing mines has dropped, he said.
Demand for the ore will reach 829.5 million metric tons next year as the nation adds steel making capacity, Lian Minjie, the general manager of Sinosteel's mining unit, said Nov. 15.
Demand will reach 958.1 million tons in 2010, with 10 percent growth in 2008 and 5 percent growth in 2009.
China, which produces one third of the steel in the world, may add 100 million tons of steel capacity by 2010. The government has called on local mills, including Anshan Iron & Steel and Panzhihua Iron & Steel, to produce more iron ore locally.
Contract iron-ore prices, which are set for 12-month periods, have risen for the past five years on increased demand from China, and may gain 50 percent next year, Macquarie said last month. The price could rise more than 50 percent due to recent gains on the spot market, Goldman Sachs JBWere analysts said Nov. 21.
The price of iron ore arriving at Beilun, where the largest steel maker in China receives shipments, rose 4.2 percent last week to 1,500 yuan, or $203, a metric ton, the highest since the data began being collated by Bloomberg in June 2006.
Prices will rise substantially next year, Rio's Sam Walsh, the chief executive officer of Rio's iron-ore unit, said Monday in London, where the company is based.
Tom Albanese, Rio's chief executive officer, approved the construction of two new iron-ore mines in Australia this week, and increased the company's global output target to 600 million tons at a cost of $26 billion.
That is more than four times the 2006 output of 133 million tons of the ore.
BHP, bidding $128 billion to take over Rio in the biggest mining merger in the world, has approved a $2.2 billion expansion to increase iron-ore output in Western Australia by 20 percent to 155 million tons as early as 2010. The third-largest iron ore producer in the world started a preliminary study to almost double output to 300 million tons.
Vale plans to spend $10 billion on an iron-ore project in the Amazon to help meet surging Chinese demand for steel.
China is scouring the globe to secure supplies of raw materials to feed demand for goods like autos and appliances. Baosteel, the biggest steel maker in the nation, plans to buy rivals to triple production capacity by 2012.
Global steel output is rising at 17 percent a year, which will support a gain of 35 percent in iron ore prices next year, Credit Suisse analysts said in a Nov. 8 report.
