The boom behind the boom

IN a global market where metal stocks are shining brightly not-so-sexy iron ore has come of age – a golden age, and the euphoria is set to continue.

There’s really only one reason why we’re in a resources boom: Australia has iron ore — lots of it too — and China is buying it just as quickly as we’re digging it out of the ground. It’s the boom behind the boom.

The price of iron ore has more than doubled in the past three years, to a benchmark price of US$51 a ton. Sober and conservative analysts are projecting a price rise of 30% or more again next year; ice pipe-smoking analysts forecast more.

Overall, according to IBISWorld, real revenue is expected to rise at an average annual rate of about 11.6% over the five years ending in 2012-13.

By 2012-13, Australia’s iron ore production and exports are expected to be about 440 million tonnes and 415 million tonnes, respectively. Short of placing a big neon sign on top of BHP Centre in Lonsdale Street saying ‘We’re Doing Nicely Thank you’, BHP Billiton’s takeover bid of Rio Tinto is the surest sign yet of confidence and optimism in the market.

Despite BHP’s bold bid to swallow Rio both companies are pledging billions to boost production by two or three times over the next five years. As I’m sure those of you in the iron ore game will attest, this is having a dramatic effect on mining operations.

Refreshingly, mining production is no longer a clash of the BHP, Rio titans with everyone else taking cover or fighting over a few scraps. There’s room for everyone.

A multitude of smaller companies are vying for a piece of the big boys’ action — and getting it too as evidenced by the number of Lamborghinis, Ferraris, and Bentleys double parked outside Black Tom’s bar in East Perth.

Until a few years ago no-one even knew what a ‘junior miner/explorer’ was or did. Now there’s more than 50, most in the iron ore game and most backed by Chinese investors keen to eek out alternative suppliers, but junior explorers aplenty nonetheless.

Speaking of all things Chinese it was no coincidence that China’s President Hu Jintao was welcomed in Perth like a Ming Dynasty emperor during a stopover in WA in September before APEC.

Although the visit went largely under the radar it’s fair to say that Jintao wasn’t in town to peruse the wildflowers at Kings Park, climb the Belltower on the Esplanade, or whet his whistle with a Fremantle Pilsner at the Sail and Anchor. His visit signified an important milestone in the relationship between WA and China.

In fact, China is now WA’s highest ranked trading partner, with two-way trade worth more than $15.3billion and exports from WA to China worth more $13.8billion. This represents a 330% increase in two-way trade since 2002-03 and a 340% increase in exports during the same period. This growth in trade is phenomenal, with WA now accounting for 60% of all Australian exports to China — the bulk of which is of course centred on the resource sector, but there is now also huge scope to capitalise in other areas, including education services, tourism, medical research and science and innovation.

However, there is an iron ore beneficiary who overshadows all. His name is Andrew Forrest.

For some obscure reason, his friends call him ‘Twiggy’, but everyone else knows him as the ‘New Force in Iron Ore’ — and a force to be reckoned with he is. BHP execs probably call him many things most of which are not fit to print.

Short and ruddy-faced, with reddish curly hair, Andrew has put more than a few noses out of joint with his irreverent and frequent head-on clashes with the mining titans over his ambitious and controversial iron ore infrastructure plans for the Pilbara; his name only uttered through gritted teeth at BHP Board meetings. This exuberant 45-year-old doyen of mining whose pioneering ancestors single-handedly opened the West with nothing more than an axe and a compass is one of a new breed of mining entrepreneur — a modern-day Lang Hancock with all the charm and none of the affront. Amazingly Andrew has become a billionaire through the iron ore company he founded, Fortescue Metals Group, in 2003 despite not yet shipping as much as a tablespoon of iron ore to his customers in China. However, there is believed to be a large digital display in FMG’s offices counting down to the time left for the company to meet its target of first ore on ship in mid-May.

The history books will no doubt fondly refer to this once-in-a-lifetime iron ore uberboom. BHP and Rio will be mentioned of course, as will President Hu Jintao and Andrew Forrest, as will some of the junior explorers, but what will become of the West? — Let’s hope more than just a hole in the ground.

Got any feedback? Email jamie.wade@reedbusiness.com.au.

For more on the economic outlook for the iron ore sector, see the December issue of Australian Mining.

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