Iron ore mining outlook

THE outlook for the Iron Ore Mining Industry will be heavily influenced by trends in steel demand and production, price negotiations with Japanese steel producers and the value of the Australian dollar, according to IBISWorld.

THE outlook for the Iron Ore Mining Industry will be heavily influenced by trends in steel demand and production, price negotiations with Japanese steel producers and the value of the Australian dollar, according to IBISWorld.

Australia’s production and exports of iron ore are both expected to continue rising strongly.

The demand for iron ore is expected to continue expanding strongly during the early years of the outlook period as steel production, particularly in China, continues to boom.

Australia is well placed to take advantage of growth in iron ore demand, since it is, together with Brazil, the lowest-cost producer.

By 2011-12, Australia’s iron ore production and exports are expected to be about 430 million tonnes and 405 million tonnes, respectively.

The increased output will come from both new operations and expansions at existing mines.

Expansions at a number of iron ore projects will come fully on stream over the next few years.

BHP Billiton is lifting output at a number of mines beyond the original anticipated capacity, while in the latter part of 2006, Rio Tinto expanded its Tom Price and Marandoo mines by 15 million tonnes per year and constructed new mine capacity at Nammuldi.

Portman Mining increased the capacity of its Koolyanobbing operation to 8 million tonnes (also in 2006).

A relatively new entrant to the industry, Mount Gibson Iron Ore, will also contribute to the growth from its Tallering Peak mine.

Further capacity expansions and new mines are also planned. Rio Tinto is to expand its Yandicoogina mine from about 36 million tonnes per year to 52 million tonnes per year, with the new capacity becoming available in late 2007 or early 2008.

Rio Tinto’s Hope Downs iron ore project and associated infrastructure (22 million tonnes per year) was approved in 2006 and is expected to commence production in 2008.

BHP Billiton’s Rapid Growth Project 3, currently under construction and due for completion in late 2007, will add about 20 million tonnes to the firm’s iron ore output capacity.

BHP Billiton is also expected to proceed with Rapid Growth Project 4, which will add a further 25 million tonnes of iron capacity by about 2010.

A new entrant to the industry, Fortescue Metals Group, is currently constructing its 45 million tonne per year Pilbara Iron Ore project, due to commence production in 2008.

Two people were killed when Cyclone George swept through one of the company’s rail construction camps in March 2007 and it is unclear whether the accident and investigations into the company’s handling of events will cause the construction timetable to slip.

The $2 billion project involves the construction of port facilities and a 260 kilometre railway line. Although privately owned, the railway will allow third party access.

Another Fortescue Metals project, Mindy Mindy, has also had its share of controversy.

In mid 2004, the company attempting to gain access to BHP Billiton’s rail network in the Pilbara by launching a bid to have the railway declared for third party access by the National Competition Council (NCC).

Although the NCC found in favour of Fortescue Metals Group, the Federal Treasures declined to follow their recommendation that the railway line be declared.

Fortescue then initiated proceedings regarding the matter in the Australian Competition Tribunal in June 2006.

BHP Billiton has consistently claimed that the railway lines are an integral part of its production process and therefore should not be open to third party access. However, in December 2006, the Federal Court found that the railway lines are subject to the access regime in Part IIIA of the Trade Practices Act.

Subject to any appeals arising from the Federal Court’s decision, in order to gain access to the railway lines, Fortescue applied to the Australian Competition Tribunal, which will make a determination on the matter.

In reaching a decision, the Tribunal must determine whether each of the railway lines is of national significance, whether access to each of the railway lines would promote competition in a related market, whether it would be uneconomical for anyone to develop alternative railway lines, whether granting access would be contrary to the public interest, and whether access would create health and safety risks.

The Tribunal is likely to hand down its decision in the second half of 2007.

The ACT’s decision on access will have implications that go far beyond the small Mindy Mindy deposit. If it concludes that access should be granted, further attempts by smaller miners to utilise the rail facilities of large operators can be expected.

Rail and port expansions are being undertaken to accommodate higher output and exports.

An expansion of Hammersley Iron’s port at Parker Point near Dampier (completed in 2006) will lift iron ore handling capacity from 74 million tonnes per year to 116 million tonnes per year.

A further expansion at the same port, due for completion in late 2007, is expected to lift capacity to 140 million tonnes per year.

Robe River is also expanding its port at Cape Lambert by 25 million tonnes to 80 million tonnes per year, with completion anticipated in 2008, while the BHP Billiton Rapid Growth Projects also entail rail and port upgrades.

Iron ore prices, which rose extremely strongly in both 2005-06 and 2006-07, are set to increase again, albeit more modestly, in 2007-08.

Agreements between Australian producers and buyers have not yet been reached, but in December 2006 the Brazilian iron ore producer, Companhia Vale do Rio Doce (CVRD), reached an agreement with the Shanghai-based Baosteel Group for a 9.5% increase in the price of iron ore fines for the 2007 contract year.

An increase of similar magnitude is anticipated for Australian iron ore. However, iron ore prices are expected to trend lower after 2007-08, not least in response to large increases in supply.

The growth in China’s steel production is also expected to moderate after the Beijing Olympics in 2008, suggesting that demand pressures will also ease.

Softer prices in turn point to moderating growth in industry revenue over the course of the outlook period. Real industry revenue is expected to continue expanding in 2007-08 and 2008-09 on the back of expanding production and exports, and in response to a weaker Australian dollar. However, beyond that time, industry performance is expected to decline.

Nonetheless, real revenue is expected to rise at an average annual rate of almost 8% over the five years ending in 2011-12.

Japan was overtaken by China as the largest purchaser of Australian iron ore in 2004-05. It is expected to retain this position and also to become increasingly important as an investor in the industry.

N IBISWorld

03 9655 3881

www.ibisworld.com.au

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