Chinese demand puts new shine on iron ore
July 19, 2006 Filed Under: Mining Services
When Robert Martin discovered the LabMag iron ore project in 1960, he found a deposit laced with enough iron that a magnet would stick to some parts of the ground.
But the deposit was low grade and considered worthless at the time. Mr. Martin went on to a lengthy career with Iron Ore Co. of Canada but never forgot the site in Labrador. When it became available in 2002, he snapped it up.
“We felt that if our projections of what was going to happen in China did occur, there would be a market for this material around 2015,” says Mr. Martin, now 67 and chief executive officer of New Millennium Capital Corp., a company he formed with several other industry veterans.
“Our projections were wrong. Things moved a lot faster. The market is there now. If we could be producing pellets today, we could sell everything we could produce.”
Mr. Martin could be excused for missing the signs. Humble iron ore has been nearly forgotten in the global scramble for nickel, copper and gold.
That appears to be changing.
Inco Ltd. CEO Scott Hand, currently trying to push through a $40-billion three-way tie-up between Inco, Falconbridge Ltd. and American copper giant Phelps Dodge Corp., has said the best metals to be in are the ones that China needs, including nickel, copper and iron ore.
Anglo-Swiss mining giant Xstrata PLC, battling Inco for control of Falconbridge in a multibillion-dollar bid to enter the nickel business, is also keen on iron ore.
And there’s China, whose galloping steel production has prodded iron ore out of a 30-year slump and put projects such as LabMag on a big-budget shopping list.
New Millennium plans to open a data room next month to allow prospective partners to study the project, which a recent prefeasibility study concluded could become a $2.75-billion (U.S.) mine that would operate for 65 years, employ up to 800 people and generate cash flow of $400-million a year.
The iron ore market is reacting to changes that have played out over the past few decades, says Gordon McCreary, CEO of Toronto-based Baffinland Iron Mines Corp., which has an iron ore project in Nunavut.
The iron ore market was once dominated by steel makers, but with the energy shock of the 1970s, some began selling off mines to focus on their steel operations.
Big mining companies, meanwhile, began shopping for iron ore operations, in some cases picking up assets at what could be considered fire sale prices.
A formerly fragmented sector consolidated. Brazil’s Companhia Vale do Rio Doce, BHP Billiton Ltd. and Rio Tinto PLC together account for more than 70 per cent of seaborne iron ore trade, up from about 50 per cent in 1999.
With that shift, pricing power has moved from steel makers to mining companies.
Last year, prices for some types of iron ore spiked by as much as 87 per cent, reflecting surging Chinese steel production.
Most contracts are negotiated annually. Price increases this year have been in the range of 20 per cent for premium types of iron ore.
In The China Syndrome, a report released last week, American steel industry groups charged that China has subsidized its steel industry, the world’s biggest, by methods that range from forgiving billions of dollars in bad debts to trying to manipulate prices for raw materials, including iron ore.
China is also subsidizing its steel producers in bids to nail down raw materials, the report said. Chinese companies are preparing to invest up to $8-billion in Australian mines alone, the report said, with half of that in iron projects.
China is also pushing iron ore suppliers to sign long-term contracts, the report says.
Such developments may irk China’s competitors in the steel business, but could fuel more interest in potential new iron ore mines such as LabMag and Baffinland’s Mary River project.
Development decisions will depend on financial risk and market demand, says Mr. McCreary, who has carried a torch for the high-grade Mary River project since writing a thesis on it in 1978.
“My conclusions were that this particular project was going to be a mine. The only question was when the cycle would be robust enough for a project that has the one obvious wart that this one has — which is location — to be viable.”
Iron ore, humble no more
China’s galloping steel production has roused iron ore from a 30-year slumber and in the process has revived decades-old ore projects in Canada.
Almost all of iron ore globally – about 98 per cent – is used in making steel.
A well-travelled commodity
Seaborne iron ore – exported via ocean trade routes to coastal or near-coastal steel plants – makes up more than 90 per cent of the global export market.
Iron ore in Canada
Nearly all of Canada’s iron ore production comes from the Labrador Trough, a major geological belt extending through northern Quebec and Labrador.
Three companies – Companhia Vale do Rio Doce, Rio Tinto and BHP Billiton – account for more than 70 per cent of seaborne iron ore trade.
Annual iron ore benchmark prices are set in the seaborne export market and are based on prices negotiated between the big three producers and Japanese and European steel mills. After staying relatively flat for several decades, prices began to climb in 2003 and spiked in 2005, when producers negotiated price increases of more than 80 per cent for some types of iron ore. Increases this year were in the order of 20 per cent.
Steel makers, particularly in China, are trying to control raw material costs by investing in iron ore projects.
Seaborne iron ore trade, by exporting country for 2004.
Australia: 36% Brazil: 35% India: 8% South Africa: 5% Canada: 4% Sweden: 3%
SOURCE: NEW MILLENNIUM CAPITAL CORP.